Oil prices retreat as Israeli ground incursion proceeds cautiously

Oil futures retreated on Monday, as the global benchmark fell below $90 a barrel following a cautious ground incursion by Israeli forces into the Gaza Strip. This development helped ease concerns about the conflict escalating further.

Price action

• West Texas Intermediate crude for December delivery fell 93 cents, or 1.1%, to $84.61 a barrel on the New York Mercantile Exchange.
• December Brent crude, the global benchmark, was down 68 cents, or 0.9%, at $89.80 a barrel on ICE Futures Europe.

Market drivers

Israeli tanks and infantry made their way to the outskirts of Gaza City on Monday, cutting off a primary road that connects the northern and southern parts of the Gaza Strip, according to The Wall Street Journal. Simultaneously, the United States and other Western nations urged Tel Aviv to minimize civilian casualties.

Michael Hewson, chief market analyst at CMC Markets, commented, “With weekend events starting to see further modest Gaza incursions, the hope is that this incremental approach will ratchet up the pressure on Hamas, while avoiding another front opening up on Israel’s northern border with Lebanon and Hezbollah.”

Oil Prices Jump on Friday, Weekly Declines Continue

Despite a nearly 3% jump in oil futures on Friday, weekly declines have persisted, gradually lessening the modest risk premium that was factored into the market following the attack on southern Israel by Hamas on October 7. However, the recent surge in oil prices has still not surpassed the highs reached in late September of this year.

Sensitivity to Developments and Potential Impact on Oil Exports

Analysts argue that traders will continue to closely monitor developments, particularly in relation to any indications that the conflict could escalate into direct confrontations involving Iran. In the event that Iran’s involvement leads to a decline in the country’s oil exports, the already constrained market may come under additional pressure. They estimate that a reduction of 500,000 barrels per day could potentially drive Brent crude prices up to a range between $100 and $110 per barrel, as opposed to the current price of around $89. Furthermore, if the conflict were to spread across the region, there is a possibility that prices could spike as high as $120 per barrel.

Outlook and Hedging Strategies

Although the UBS strategists believe that it would be advantageous to avoid a broader war, they acknowledge the need for precautionary measures. As such, they suggest considering increased exposure to Treasuries as well as maintaining positions in gold and oil to mitigate potential volatility in the market.