Oil Rallies Amidst Tension in Middle East
Oil prices increased strongly on Monday over fresh supply concerns triggered by the conflict between Palestine and Israel. Expectations of higher demand from China, the world’s largest oil importer, reinforced the price upticks.
Following Hamas’ devastating attacks on Israel over the weekend and the retaliatory actions taken by Israel in Gaza, it is no surprise that the oil market opened stronger this morning. Brent has rallied more than 4% in early morning trading in Asia today with markets concerned about how the situation evolves. Up until now, the move in the market is purely reflecting an increased risk premium, rather than any change in fundamentals.
Israel is a very marginal oil producer, and so recent developments will have little direct impact on oil supply, Warren Patterson, Head of Commodities Strategy at ING said in a note. However, given the rising tension in the region and the risk that the conflict could spread, market participants will remain nervous until there is a clear de-escalation.
Looking at the medium to longer term, there has been a growing trend in recent years for a normalisation of relations with Israel for a number of Arab nations. However, clearly, the attack over the weekend could make the continuation of this trend more difficult, particularly if we see further escalation, Patterson said.
International benchmark crude Brent traded at $86.89 per barrel, translating to a 2.7% gain from the closing price of $84.58 a barrel in the previous trading session on Friday.
The American benchmark West Texas Intermediate (WTI) traded at the same time at $85.31 per barrel, up 3% from Friday’s close of $82.79 per barrel.
Iran’s public backing for Palestine, as well as the possible suspension of discussions between Iran and Western powers on removing US sanctions on Iranian oil exports that have been ongoing since 2018, have all contributed to the price rises.
Iran, the US, China, Russia, France, the UK, Germany, and the EU signed the Iran nuclear deal in 2015. Under the agreement, Tehran committed to limiting its nuclear activity for civilian purposes, and in return, world powers agreed to drop their economic sanctions against Iran.
If the deal is renegotiated successfully, Iran will be able to export oil again, which will ease market concerns over tight supply. Oil prices fell by around 9% last week, recording its steepest weekly decline of the last seven months, triggered by a strong US dollar, the build in US gasoline stockpiles, Russia’s decision to ease its diesel export ban, and the resumption of oil flow through the Iraq-Türkiye crude oil pipeline.
Does this change fundamentals?
Patterson said while oil fundamentals have not changed since these attacks, it does not mean they won’t. There are reports that Iran helped Hamas plan the attacks and gave them the “green light”.
“If this is proven to be true, we could see the US, an ally of Israel, taking a tougher stance against Iran, which could ultimately lead to a reduction in oil supply”.
The US administration has taken a much softer approach to Iran in recent months when it comes to sanctions. While US oil sanctions against Iran remain in place, they have not been strongly enforced.
This is evident by the growth in Iranian oil supply over the course of this year. Output has grown from around 2.5MMbbls/d at the start of the year to around 3MMbbls/d currently.
The softer approach from the US is likely due to concern over rising energy prices. However, it would be difficult to see the US maintaining this stance if Iran is connected to these attacks, whether directly or indirectly.
Enforcing these sanctions more strictly would mean the potential loss of at least 500Mbbls/d. The implication of losing this supply would be that the global oil balance would be tighter throughout 2024. #Oil Rallies Amidst Tension in Middle East Fidelity Bank Loses 25% of Its Market Value
