On October 7, international crude oil prices experienced a significant surge, rising over three percent. For the first time since August, Brent crude exceeded the pivotal $80 per barrel threshold, reflecting heightened geopolitical tensions in the Middle East, particularly between Israel and Iran. This uptick jolted investors who had previously entrenched themselves in record bearish positions regarding oil prices.
Brent crude futures saw an increase of $2.47, or 3.2 percent, reaching $80.52 per barrel, while US West Texas Intermediate (WTI) futures rose by $2.49, or 3.4 percent, landing at $76.87 per barrel. Last week alone, Brent escalated by over eight percent and WTI surged by more than nine percent week-on-week, marking the most substantial gains in over a year. In the domestic market, crude oil futures traded 2.13 percent higher at ₹6,474 per barrel on the Multi Commodity Exchange (MCX).
Also Read: Oil prices have soared 10% in just five days, marking the biggest weekly gain in a year due to intensifying conflicts in the Middle East, with Brent currently settling at $78 per barrel.
Brent Crude Surpasses $80: Key Factors Behind the Price Surge
Recent military actions, including rockets fired by Hezbollah into Israel, have escalated tensions, with one of Israel’s largest cities, Haifa, bearing the brunt of these attacks. Simultaneously, a missile launched from Yemen was intercepted over central Israel. In an escalation of military campaigns, Israel is poised to intensify its ground operations in southern Lebanon, coinciding with the anniversary of the Gaza conflict, thereby unsettling the already fragile regional stability.
Analysts express deepening concerns that the ongoing conflict could spiral further, putting Iran’s oil production capacity of 3.4 million barrels per day (mmbopd) in jeopardy, thereby exacerbating supply disruptions in the region.
Commodity market analysts have noted that the rally in oil prices is primarily driven by money managers closing bearish positions amid rising anxieties over potential disruptions to oil supplies from the Middle East. Hedge funds had previously built up record short positions in oil futures, driven by a pessimistic outlook on global demand, particularly from China—the world’s largest oil consumer.
Also Read: The Hang Seng index has rallied by 33% over the past 21 days as traders weigh the impact of potential stimulus measures from China.
Until recently, many hedge funds anticipated testing lower oil price thresholds in the low $60s range. However, Brent crude’s notable weekly gain last week, the highest since January, underscores a rapid change in market sentiment spurred by geopolitical unrest in a region responsible for approximately one-third of the world’s oil supply. This reversal appears stark, especially after prices declined significantly in the third quarter due to concerns over supply-demand balance in the upcoming year.
Despite the current bullish momentum, the underlying demand for crude remains subdued, and analysts believe there is sufficient spare production capacity within the Organization of the Petroleum Exporting Countries (OPEC) to cover potential losses from Iranian oil exports. Observations suggest that the recent price rally may be excessive given these underlying dynamics.
Experts indicate that a direct strike on Iran’s oil facilities remains improbable amidst escalating tensions, especially given OPEC’s seven million barrels per day spare capacity. Iran’s oil output has risen close to full capacity but could face vulnerability as geopolitical tensions escalate.
Also Read: OPEC+ is expected to pause its planned October oil output increase following a significant drop to a 14-month low.
OPEC and its allies, collectively known as OPEC+, are on schedule to initiate a production increase starting in December after years of cuts. This strategic move aims to bolster prices amidst declining global demand. OPEC has already indicated its readiness to ramp up output should market conditions necessitate additional supply.
In parallel, global markets are recalibrating expectations around US Federal Reserve interest rate cuts following a robust jobs report released on Friday. Many traders have begun to dismiss the likelihood of a half-point reduction in rates this year, as they anticipate persistent economic growth could reignite inflationary pressures.
Oil options markets reflect a predominantly bullish sentiment, encouraging traders who profit from climbing futures prices. A measure of implied volatility for Brent crude futures has surged to its highest level in almost a year, while money managers are increasing net-long positions in the global benchmark.
Also Read: China’s market rally, fueled by policy measures, may have little impact on India’s economy or capital flows.
In light of ongoing economic challenges, China’s top economic planner is set to discuss a new policy package aimed at enhancing economic growth, leading analysts to speculate on a potential increase in public spending.
Future Outlook for Oil Prices
Analysts indicate that WTI crude has registered its steepest weekly gain since late March 2023, primarily driven by fears that Israel may target Iranian oil infrastructure in retaliation for missile strikes against Israel, heightening concerns over possible supply chain disruptions through the critical Strait of Hormuz.
“Prices are expected to remain erratic due to ongoing concerns about a potential escalation into a wider regional conflict, particularly following Iran’s Supreme Leader Ayatollah Ali Khamenei’s calls for increased efforts against Israel,” stated Kaynat Chainwala, AVP of Commodity Research at Kotak Securities.
Market fluctuations have been considerable, with oil prices rebounding sharply from recent lows to reach five-week highs, driven predominantly by heightened Middle Eastern tensions and stronger-than-anticipated US non-farm payroll data. The Israeli military’s actions against Lebanon and their threats towards Iran further complicate the global oil market landscape.
Also Read: Israel’s threats of military action against Iran have raised alarms, as US officials caution against targeting oil fields in the region.
The ascent in crude oil prices is being supported by positive economic indicators from the US, such as an encouraging non-farm payroll report and a favorable unemployment rate. Moreover, the reopening of Chinese markets alongside anticipated stimulus measures is likely to enhance China’s oil demand, providing an additional layer of support for oil prices.
However, potential gains may be tempered by the impending OPEC+ production increase set to commence in December and the strengthening of the US dollar. Analysts forecast that crude oil prices will remain volatile, establishing support levels between $73.10 to $72.50 and resistance levels at $74.20 to $75.00. In Indian rupee terms, support is identified at ₹6,250 to ₹6,180, with resistance pegged at ₹6,420 to ₹6,480,” stated Rahul Kalantri, VP Commodities at Mehta Equities Ltd.
Disclaimer: The insights and recommendations expressed in this analysis reflect personal opinions from individual analysts or brokerage firms. For investment decisions, consult certified experts to ensure that individual circumstances and market conditions are accurately accounted for.
