Crude oil price: Brent, WTI pull back as markets watch Gaza

Oil prices pull back as markets watch Israel-Gaza war

Brent crude futures stabilized near $88 per barrel on Wednesday, with concerns easing about potential disruptions in Middle East oil supply due to the Israel-Hamas conflict. The front-month contract for WTI crude, the benchmark for U.S. oil, traded below $86.

On Monday, both WTI and Brent saw surges of over 4% in response to the series of attacks launched by Hamas on Saturday, which were subsequently met with retaliatory actions by Israel. On Sunday, Israel declared a formal state of war for the first time since 1973, setting the stage for a major military operation in the Gaza Strip. The attacks led to risk-off sentiment across global markets, with investors drawn to safe-haven purchases of gold and the U.S. dollar.

While crude saw a sharp jump on Monday, it’s worth noting that oil prices had retraced considerably in the previous week after reaching their 2023 peaks, with Brent almost touching $100 per barrel and WTI exceeding $95 per barrel in late September.

Israel produces very little crude oil, but markets are worried that the conflict could escalate and disrupt Middle East supply, worsening an expected deficit for the rest of the year.

"There is still a risk that this escalates, particularly if there is any Iranian involvement. Under this scenario, stronger enforcement of U.S. sanctions on Iranian oil would tighten up the oil market through 2024," said Warren Patterson and Ewa Manthey, analysts from Dutch bank ING, in a note to clients.

Saudi Arabia reiterated its commitment to OPEC+ efforts to stabilize oil markets and support global economic growth. Iran has denied any involvement in Hamas' actions against Israel, and the White House stated it had no evidence of Iran planning or directing the assault.

In other news, Reuters reported progress in discussions between Venezuela and the US, potentially leading to sanctions relief for Caracas, allowing one additional foreign oil company to purchase Venezuelan crude oil under certain conditions. Despite these developments, the global oil benchmark remained up approximately 4% for the week — primarily due to increased war-risk premium associated with the Middle East conflict.

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Crude oil news: Investors closely monitoring developments in the Middle East

As noted by multiple analysts, the potential for further oil price rises is linked to the likelihood of further escalation in the Middle East.

“If Israel discovers that Iran played a role in Hamas’ attack, it could retaliate militarily. At the very least, any warming of relations between Iran and the West is now on hold and this will limit incremental oil supply,” Nicholas Colas, co-founder of DataTrek Research, said in a Monday note quoted by MarketWatch. He added:

"While neither Israel nor Gaza are major oil producers, everything that happens geopolitically in the Middle East invariably ends up affecting oil prices.”

Olivier d’Assier, head of applied research, APAC, at Axioma, said the potential for a broader conflict could lead to a “sharp market correction.” The scale of the conflict — the largest since the Yom Kippur War 50 years ago — draws comparisons with how markets have shaken off past geopolitical incidents, but they may be irrelevant in terms of stress testing, he argued.

“The closest historical scenarios we could use would be 9/11 and the start of the Ukraine war. But because both took place on Western soil, they might not be adequate.”

Oil price forecast: Analysts mixed on supply impact of Gaza war

The effect of the war in Gaza on oil and gas prices has been detailed by multiple analysts. Dryad Global analyst Noah Trowbridge expanded on the conflict’s impact on oil supply and trade in the region to industry website Rigzone late on Tuesday:

“Israel has suspended operations at the offshore Tamar gas field as a security precaution and is investigating alternative fuel sources. This will also impact Israel’s trading partners, including Egypt, whose imports of Israeli gas have already been cut by 20 percent.

Although not directly targeted by Hamas, Israel’s commercial ports have also been impacted by the surprise offensive. The port of Ashkelon has been closed, whilst the ports of Ashdod and Haifa remain operational. Considering Ashdod and Ashkelon are located within rocket range of the Gaza strip, the risk of port infrastructure being indiscriminately targeted by Palestinian strikes is subsequently assessed to be substantial.”

As markets reacted to the conflict on Monday, Rigzone noted that banks had a wide range of takes on the potential impacts for crude oil prices going forward:

• Citigroup suggested that the ongoing hostilities diminish the likelihood of Saudi Arabia reducing or eliminating its daily output cuts of 1 million barrels. There is also an increasing risk of Israel launching an attack on Iran, the Citi analysts wrote.
  
• Morgan Stanley, on the other hand, believes that the conflict's impact will likely be contained. They do not anticipate immediate spill-over into other nations, which should result in a muted long-term effect on crude prices.
  
• Societe Generale has pointed out that heightened geopolitical tensions might introduce a risk premium of $5 to $10 to crude prices.
  
• RBC Capital Markets analysts, including Helima Croft, suggest that Israel may intensify a long-standing covert battle against Iran, but the nature of Tehran's response to such an escalation remains uncertain.

At the time of writing, the continuous Brent futures contract on the ICE was trading at $87.34 (down 0.38% on the day), while the continuous WTI contract on the NYMEX was down 0.41%, trading at $85.62, as per MarketWatch data.

When considering oil and other commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.