The oil market is likely to maintain its upward trajectory amid concerns over potential significant disruptions in production across the Middle East, should ongoing conflicts escalate into a broader regional war.
Last week, crude oil prices surged by nearly 9%, representing the largest weekly increase since March 2023, following a substantial intensification of hostilities in the Middle East.
Some analysts suggest that the spare capacity of OPEC+ and production levels in the United States could mitigate any immediate supply shocks. However, a more extensive conflict in the region could cause prolonged disruptions in global oil markets.
In early trading during Monday’s Asian session, oil prices experienced a slight decline. Brent futures on the Intercontinental Exchange (ICE) dropped by 0.35%, settling at $77.78 per barrel, while West Texas Intermediate (WTI) futures on the New York Mercantile Exchange (Nymex) fell by 0.23% to $74.21 per barrel as of 6:24 am CET.
Escalating Middle Eastern Tensions
On Tuesday of last week, *Axios* reported that Israeli officials had announced plans to target Iran’s oil production facilities and other strategic sites within Iran, following Iran’s ballistic missile attack.
On Saturday, Israel reiterated its intention to respond “when the time is right,” though US President Joe Biden indicated that Israeli authorities had yet to finalize their course of action.
On Sunday, Iran’s state news agency, Shana, reported that Oil Minister Mohsen Paknejad visited the Kharg Island oil export terminal, which handles 90% of Iran’s oil exports. During his visit, Paknejad addressed national television, stating, “We are not afraid that our enemies will ignite a crisis, and visiting the region is a normal business trip.”
He also met with the commander of the Revolutionary Guards Navy, underscoring the Navy’s essential role in safeguarding oil and gas facilities.
Iran ranks among the world’s top 10 oil producers, with its production reaching over 3.3 million barrels per day in August—the highest level in five years, according to the Organisation of the Petroleum Exporting Countries (OPEC). Iran’s oil exports have also risen to a multi-year high of 1.7 million barrels per day, contributing at least 2% to the global supply.
Oil price trajectory
Over the past year, crude oil prices have ranged between $66 and $96 per barrel, reaching a 16-month low in September as economic concerns outweighed geopolitical risks.
Weak demand from China and subdued global economic indicators have tempered the outlook for oil markets this year. However, the recent escalation in the Middle East has revived fears of supply interruptions, with potential consequences should the conflict expand into a larger regional war.
Kelvin Wong, Senior Market Analyst at Oanda, stated, “No visible diplomatic signs or activities support the de-escalation of hostilities in the Middle East.”
He further noted that strong US non-farm payroll data, released last Friday, reinforced expectations of a soft landing for the US economy, thereby injecting positive sentiment into oil markets.
“Geopolitical risk premiums and ‘US soft landing vibes’ following a positive NFP print for September are supporting macro factors likely to underpin WTI crude oil’s short-term bullish trend,” Wong explained.
From a technical perspective, oil prices surpassed the 50-day moving average for the first time in two months following last week’s spike. According to ICE Futures Europe data, net long positions in Brent crude increased by over 20,000 contracts in the week ending October 1.
Impact on broader markets
Global markets adopted a risk-averse stance last week as heightened geopolitical tensions propelled oil prices, benefiting energy and defense stocks.
Should military hostilities between Iran and Israel intensify further, this trend is likely to persist in the upcoming week.
Safe-haven assets such as gold and the US dollar may continue to consolidate, while risk-sensitive assets like technology stocks could experience downward pressure.
Additionally, the euro may weaken further against the US dollar due to rising concerns about the impact of increased energy prices on the European economy.
