Brent crude tops $80 a barrel on fears Middle East war will threaten supply

By Myra P. Saefong and William Watts

Risk of Israeli response to Iranian missile attack intensifies

Oil futures rose by more than 3% on Monday, with global Brent prices topping $80 a barrel for the first time since August, as the risk of an Israeli response to last week's Iranian missile strike intensified.

That raised the potential for a more direct conflict between Israel and Iran that could threaten crude supplies from the region.

Price moves

-- December Brent crude BRN00 BRNZ24, the global benchmark, was up $2.42, or 3.1%, at $80.47 a barrel on ICE Futures Europe after touching a high at $80.57. Prices for the front month haven't traded above the key $80 mark since August, FactSet data show.

-- West Texas Intermediate crude CL00 for November delivery CL.1 CLX24 rose $2.50, or 3.4%, to $76.88 a barrel on the New York Mercantile Exchange, eyeing the highest finish since late August.

-- November gasoline RBX24 added 3.1% to $2.1596 a gallon, while November heating oil HOX24 climbed 3% to $2.3828 a gallon.

-- Natural gas for November delivery NGX24 traded at $2.746 per million British thermal units, down 3.8%.

Market drivers

"Oil prices have rallied significantly as the Middle East war extends to Lebanon" and on speculation that an Israeli counterattack on Iran is imminent, Jay Hatfield, chief executive officer at Infrastructure Capital Advisors, told MarketWatch. If Iranian oil production is hit by a counterstrike, "oil prices could spike to as high as $90 per barrel if there is extensive damage."

See: Israeli strikes on Iran's 'oil island' could send crude prices soaring

Israel has vowed to retaliate for a ballistic missile attack last week by Iran. Hezbollah on Monday fired rockets at Haifa in northern Israel. The Israeli military stepped up its bombardment of northern Gaza and southern Lebanon.

Read: Bets oil will hit $100 a barrel surge on fears of wider Middle Eastern war

"Israel targeted more sites in Lebanon on Sunday night, but the bigger risk for markets would be an Israeli strike on Iran's nuclear facilities or on its oil fields. In this extreme scenario, oil would likely surge more than $10, and fears about an escalation in tensions could lead to greater demand for safe havens like the dollar," Kathleen Brooks, research director at XTB, said in a note.

Monday marks one year since Iran-backed Hamas launched a deadly attack on southern Israel, setting off the war in Gaza. Israel last month stepped up attacks on Iranian-backed Hezbollah in Lebanon, killing the militia group's leader.

"We don't see significant downside to oil prices from here, even if the strike does not target oil production," said Hatfield. "Prices are depressed due to seasonal factors and there is optimism regarding demand out of China due to powerful government stimulus."

In Monday's newsletter, however, analysts at Sevens Report Research said that geopolitics aside, the "fundamental backdrop of the oil market remains mixed."

Stabilizing economic data are "easing hard landing fears," which is bullish for oil prices, but are also dialing back very dovish Federal Reserve policy expectations, which is bearish for oil, they said.

The Organization of the Petroleum Exporting Countries and its allies, meanwhile, continue to signal a likely December start to planned production increases, which is bearish for oil prices, the Sevens Report analysts said.

Brent crude rose 9.1% last week, its largest weekly gain since October 2022. WTI rose the same amount, the biggest weekly gain for the U.S. benchmark since March 2023.

Stephen Innes, managing partner at SPI Asset Management, said supply-and-demand dynamics may hold more sway for oil than the latest geopolitical drama.

"Despite Iran firing missiles at Israel and the drumbeat of war in the region, crude hasn't exploded," Innes said in market commentary. Prices are up 10%, but from a "pretty low base," he said, with traders "banking on the idea that this conflict won't lead to long-term disruptions in oil production from key players" like Saudi Arabia and the UAE.

Even if Iran's 3.4 million barrels per day of oil production gets knocked offline, OPEC+ has about 5.5 million barrels per day in spare capacity to cover the loss, Innes said. "The market is clearly betting that geopolitical tension won't morph into a full-blown oil supply shock."

Read: Oil shock? How OPEC+ could soften the blow if the Middle East conflict hits supply.

"The real threat to crude isn't war, it's oversupply," said Innes. OPEC+ looks ready to gradually reverse its voluntary 2.2 million barrels per day in output cuts starting in December, "setting the stage for a flood of oil."

Oil prices, while seeing episodes of volatility, have weakened over the past year, with the conflict so far failing to significantly affect flows of crude from the Middle East, while concerns have mounted about demand from China, the world's largest crude importer.

In the U.S., energy traders are keeping a close watch on Hurricane Milton, which is expected to approach Florida's Gulf coast on Wednesday. On Monday morning, the National Hurricane Center said the storm is forecast to strengthen to a Category 5 hurricane later in the day.

Milton is not expected to directly affect liquified natural gas export facilities, "which likely limits longer-term price implications," Seth Harper, commodity analyst at Schneider Electric, said in market commentary. "Nonetheless, Milton could significantly dampen power generation demand in Florida given the likelihood of near-term outages."

-Myra P. Saefong -William Watts

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10-07-24 1217ET

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