Oil Prices Surge as Traders Assess Aftermath of Deadly Hamas Attack

Price Action

• West Texas Intermediate crude for November delivery rose $2.90, or 3.5%, to $85.69 a barrel on the New York Stock Exchange.
• December Brent crude, the global benchmark, was up $2.81, or 3.3%, to $87.39 a barrel.
• November gasoline rose 2.7% to $2.25 a gallon.
• November heating oil gained 2.2% to $2.96 a gallon.
• November natural gas added 1.8% to $3.40 per million British thermal units.

Market Drivers

The energy market was on edge after a surprise attack by Hamas on Israel over the weekend, with reports indicating that Iranian security officials aided in the planning. The attacks resulted in a devastating loss of lives, with approximately 700 casualties in Israel and nearly 500 in Gaza. Additionally, Hamas claims to have taken more than 130 captives.

In response to the attacks, oil prices surged over 4% on Sunday. Concerns arise about the potential involvement of Iran, which could lead to sanctions on the country’s crude exports. Iran’s exports have been steadily increasing and are approaching levels not seen since before 2018.

The surge in oil prices comes after a period of decline last week, following Brent’s near approach to the $100-a-barrel threshold and WTI briefly surpassing $95 a barrel for the first time in over a year.

Analysis of Recent Developments in the Oil Market

According to The Wall Street Journal, Iranian crude production has reached its highest levels since the U.S. withdrawal from the Iranian nuclear accord in 2018, with more than 3 million barrels a day and exports exceeding 2 million barrels a day. However, in 2020, sales plummeted to around 400,000 barrels a day due to the reimposition of sanctions by the U.S.

Notably, the recent attacks on Saudi Arabian facilities will likely have bullish implications for oil prices, as stated by Edward Morse and a team at Citigroup. These attacks, coinciding with the 50th anniversary of the Yom Kippur War in October 1973, have the potential to disrupt oil markets and reshape the structure of global oil and product markets.

Morse emphasizes that the timing of these attacks will impact various geopolitical dynamics. Firstly, it is expected to postpone any potential Saudi/Israeli rapprochement and diminish the likelihood of Saudi Arabia reducing or eliminating its current extra 1 million barrels per day cut if oil prices continue to fall. Additionally, the risk of an Israeli attack on Iran increases given Iran’s support and encouragement to Hamas. The exact timing of such an attack remains uncertain. Furthermore, any expansion of battles in the region will undoubtedly have significant repercussions on oil markets.

Contrary to these sentiments, Goldman Sachs analyst Daan Struyven argues that the recent attacks are unlikely to cause an immediate large effect on the near-term supply-demand balance and near-term oil inventories – which are the primary drivers of oil prices. In fact, Struyven maintains that Brent prices will likely reach $100 a barrel by June 2024.

The Goldman Sachs team also highlights the reduced possibility of a Saudi-Israeli deal that would lead to increased production. Moreover, downside risks loom over Iranian production in light of these developments.

In summary, recent events in the oil market have created an atmosphere of uncertainty. While some experts anticipate bullish implications for oil prices due to the attacks on Saudi Arabian facilities, others argue that the immediate effects on oil supply-demand balance may be limited. Ultimately, the geopolitical dynamics influenced by these events will determine future market trends.