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

By Myra P. Saefong and William Watts

Oil futures climbed on Monday, building on last week's strong gains as investors monitored developments in the Middle East amid fears a more direct conflict between Israel and Iran could threaten crude supplies from the region.

Price moves

-- West Texas Intermediate crude CL00 for November delivery CL.1 CLX24 rose $1.57, or 2.1%, to $75.95 a barrel on the New York Mercantile Exchange.

-- December Brent crude BRN00 BRNZ24, the global benchmark, was up $1.19, or 1.5%, at $79.24 a barrel on ICE Futures Europe after touching a high at $79.94.

-- November gasoline RBX24 added 1.5% to $2.1274 a gallon, while November heating oil HOX24 climbed 1.6% to $2.3498 a gallon.

-- Natural gas for November delivery NGX24 traded at $2.771 per million British thermal units, down 2.8%.

Market drivers

"Tensions in the Middle East will continue to move markets in the sessions ahead as traders await clarity on how the conflict will be resolved," analysts at Sevens Report Research wrote in Monday's newsletter.

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

"However, geopolitics aside, the fundamental backdrop of the oil market remains mixed amid stabilizing economic data that is easing hard landing fears," which is bullish for oil prices, but also dialing back very dovish Federal Reserve policy expectations, which is bearish for oil, they said.

The Organization of the Petroleum Exporting Countries and their 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.

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

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

"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.

Still, Stephen Innes, managing partner at SPI Asset Management believes that oil traders seem to "care more about the supply-demand dynamics 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," 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, said Innes. "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 bpd 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.

-Myra P. Saefong -William Watts

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10-07-24 1025ET

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