In early Asian trading on Tuesday, oil prices experienced a slight decline as profit-taking ensued following a significant rally that saw prices reach their highest levels in over a month. The recent surge in oil prices was driven largely by escalating tensions in the Middle East, particularly following an attack by Iran-backed Hezbollah on Israel’s third-largest city, Haifa. This escalating conflict has raised concerns of a broader regional war, prompting traders to adjust their positions. Brent crude futures fell by 23 cents, or 0.3%, settling at $80.70 per barrel, while U.S. West Texas Intermediate futures also dropped by 20 cents, or 0.3%, to $76.94 per barrel.
The upward trend in oil prices began after a missile barrage from Iran against Israel on October 1, which sparked fears of retaliatory actions. Israel has indicated its intention to respond firmly, with speculation that its military considerations could include strikes on Iranian oil infrastructure. Such actions would mark significant escalations in the ongoing conflict that has been exacerbated since the Hamas attack on Israel a year ago. Despite these developments, traders and analysts are cautious, weighing the implications of potential military responses on global oil supply and prices.
Following the surge earlier in the week, both Brent crude and West Texas Intermediate saw gains exceeding 3%, reaching levels not seen since late August. This marked the continuation of a rally that began the previous week, registering over an 8% increase and marking the largest weekly gain in more than a year. However, analysts caution that while tensions remain high, any retaliatory action from Israel focused on Iranian oil assets might not occur as anticipated, and should it happen, the overall impact on global oil prices could be mitigated by ample spare supply capacity within the Organization of the Petroleum Exporting Countries (OPEC).
ANZ Bank analysts highlighted that if Israel were to target Iranian oil facilities, OPEC has around 7 million barrels per day of spare capacity that could potentially offset lost production. This suggests that the oil market may not be as susceptible to disruptions as initially feared. In such scenarios, downward pressure on oil prices could materialize, especially if the focus shifts away from Iranian targets. The cautious outlook from analysts indicates that while geopolitical tensions are influencing the market, the response from major oil producers plays a crucial role in determining price stability.
Adding to the complexities in the oil market, Hurricane Milton has developed into a Category 5 storm and is making its way toward Florida. The hurricane has already necessitated the shutdown of at least one oil and gas platform in the U.S. Gulf of Mexico, raising concerns about potential disruptions in offshore production. These weather-related factors contribute an additional layer of uncertainty to the existing geopolitical tensions, as any significant operational disruptions could further influence market dynamics and price fluctuations.
Expectations for U.S. crude oil inventories have also emerged, with preliminary data indicating a potential rise of 1.9 million barrels for the week ending October 4. The American Petroleum Institute is scheduled to release its data on U.S. stockpiles later in the day, providing further insight into domestic supply trends. The Energy Information Administration is expected to follow with its official report, shedding more light on inventory levels and potentially informing market reactions amid the interplay of geopolitical tensions, supply concerns, and the impact of severe weather on production capabilities. As traders navigate this multi-faceted landscape, the coming days will be pivotal in assessing the stability of oil prices amidst ongoing volatility.