Crude oil prices rallied by nearly 9 percent this week, registering their best weekly performance in roughly two years amid severe geopolitical tensions in the Middle East.
November West Texas Intermediate crude oil prices finished the session up by $0.96, or 1.3 percent, at $74.67 per barrel. U.S. crude registered a weekly gain of 8.8 percent, the biggest weekly increase since October 2022, lifting its year-to-date gain by nearly 5 percent.
Brent, the international benchmark for oil prices, also recorded modest gains to end the trading week. December Brent crude futures rose by 20 cents, or 0.26 percent, to $78.26 per barrel. Brent posted a weekly increase of 8.7 percent. So far this year, Brent has climbed by 1.5 percent.
All About the Middle East
Oil prices added to their gains at the end of the trading week as traders braced for Israel’s response to the barrage of ballistic missile attacks by Iran.President Joe Biden told reporters on Oct. 3 that his administration is discussing a potential Israeli strike on Tehran’s energy infrastructure.
Forex.com market analyst Razan Hilal says the threat of significant retaliation has fueled concerns over potential crude supply disruptions and bolstered near-term price action in global energy markets.
“Recent price action, combined with the relative strength index (RSI) bouncing off December 2023 lows, and ongoing conflicts in the Middle East, suggest a short-term neutral to bullish outlook,” Hilal said in a note. “The $76 level will be key in confirming a stronger bullish move.”
Despite the sizable rally in oil markets, ING commodity strategists say the price action “seems fairly modest” because traders have become “numb” to the persistent Middle East tensions in the past year.
This past spring, Israel responded to Iran’s drone and missile attacks with a measured and targeted retaliation by hitting an airbase. The decision calmed down oil markets and sent prices tumbling. By early September, West Texas Intermediate (WTI) crude prices erased their 2024 gains and slumped below $66 per barrel.
While oil has surged this week on the escalating war-risk premium, investors have seen this happen repeatedly over the past year. When it looked like WTI and Brent were on the cusp of rocketing toward $100 per barrel, the benchmarks suffered supply-driven selloffs as fears of a wider Middle East conflict failed to materialize.
However, the situation metastasizing and disrupting supplies “would change this,” ING strategists say.
“The key uncertainty now is how Israel will respond,” they wrote in a note. “Significant escalation would likely involve targeting Iranian nuclear facilities and energy infrastructure, which would likely boost the risk premium priced into the oil market.”
According to Phil Flynn, an energy strategist at The PRICE Futures Group, Israel striking Iran’s oil infrastructure and taking out its production capabilities would trigger a $10-per-barrel rally at minimum.
“Normally when we get that type of an attack, we’ll get a price spike big spike and a drop in price as demand takes a hit,” Flynn said in a daily analysis, noting that a spike of $20 per barrel could happen if it shifts into a broader regional conflict.
Energy economist Anas Alhajji estimates on social media platform X, formerly known as Twitter, that worldwide oil markets experiencing a loss of most of Iran’s crude would trigger a spike of “no more than $7.”
“But the bigger story is if Iran hit oil facilities in neighboring countries in retaliation, that will increase prices by more than $20 [per barrel],” he said.
Iran produces approximately 3.5 million barrels per day and exports about 1 million barrels per day.
That said, many market watchers’ outlooks are based on the notion that Saudi Arabia, the United Arab Emirates (UAE), and other members of the Organization of the Petroleum Exporting Countries (OPEC) would not respond to a possible supply disruption by expanding output.
OPEC producers and their allies, OPEC+, recently postponed plans to start tapering voluntary production cuts by two months to December. The group announced last month that it would gradually phase them out between Dec. 1 and the end of 2025, “with the flexibility to pause or reverse the adjustments as necessary.”
Officials projected at their unannounced virtual meeting on Sept. 5 that they will contribute 189,000 barrels per day in December and 207,000 barrels per day in January to international energy markets.
Claudio Galimberti, the Rystad Energy director of global market analysis, estimates that Saudi Arabia, the United Arab Emirates (UAE), and Iraq alone have about 5 million barrels per day of ample supply.
“It can be very quickly deployed within 30 to 60 days,” Galimberti said in a recent video commentary. “We have the spare capacity right now.”
Analysts at S&P Global Commodity Insights calculated that the alliance holds approximately 5.8 million barrels daily offline.
America’s Oil Sector
According to the Energy Information Administration (EIA), domestic crude oil inventories soared by 3.889 million barrels for the week that ended on Sept. 27, up from the previous week’s drawdown of 4.471 million barrels. The consensus estimate suggested a withdrawal of 1.3 million barrels.Gasoline supplies rose by 1.119 million barrels, up from the decline of 1.538 million barrels the previous week.
U.S. crude production has been solid since the middle of 2023 as the country produces more oil than it did before the COVID-19 pandemic.
EIA data show that in July, the United States produced 13.205 million barrels per day. The federal government projects that domestic oil output will average 13.7 million barrels per day in 2025.
However, the number of active drilling rigs has fallen substantially this year, to 479 for the week that ended on Oct. 4, according to the weekly Baker Hughes Oil Rig Count.
