Oil Prices Post Biggest Weekly Gain Since March 2023 Amid Supply Disruption Fears

Oil prices recorded their largest weekly gain since March 2023,
driven by escalating concerns over potential supply disruptions due to rising geopolitical tensions in the Middle East.
However, oil pared some of its gains after U.S. President Joe Biden sought to discourage Israel from attacking Iranian oil fields.

West Texas Intermediate crude rose 0.9% to settle above $74 per barrel on Friday,
after climbing as much as 2.5% earlier in the day.
The gains eased following Biden’s comments at the White House, where he told reporters,
in reference to Israel’s potential retaliation against Iran after a recent missile attack:
“If I were in their shoes, I would consider alternatives to attacking oil fields.”

Topic

Supply Disruption Fears

Rising Tensions in the Middle East

Risks to Energy Infrastructure

Market Outlook

Supply Disruption Fears

Despite the pullback, oil prices remained up 9.1% for the week, marking the biggest weekly rise since March 2023.
The escalation of hostilities heightened fears of potential supply disruptions in the Middle East.
The intensifying tensions between Israel and Iran, alongside Iran’s proxies in Lebanon, Gaza, and Yemen,
have sparked concerns of a broader conflict that could impact other nations in the region.

Bjarne Schieldrop, chief commodities analyst at SEB, noted that while the chances of a worst-case scenario remain low,
markets are closely watching developments in the coming days, especially as Israel prepares for possible retaliation against Iran.

Rising Tensions in the Middle East

These tensions flared after Iran fired a barrage of missiles at Israel earlier in the week in response to Israel’s increased attacks on Iran-backed Hezbollah in southern Lebanon. In response, the Group of Seven (G7) called for the region to “act responsibly and exercise restraint.”

The Middle East accounts for roughly one-third of the world’s crude oil supply. Iran has been producing about 3.3 million barrels per day in recent months, making it the third-largest producer within the Organization of the Petroleum Exporting Countries (OPEC). According to Citigroup, a major Israeli strike on Iran’s export capabilities could reduce daily global supply by around 1.5 million barrels.

Risks to Energy Infrastructure

There are also concerns that Iran may escalate the situation by targeting energy infrastructure in other countries or disrupting key supply routes such as the vital Strait of Hormuz. ClearView Energy Partners noted that a halt in the flow of oil through this critical waterway could result in oil prices surging by $13 to $28 per barrel.

Market Outlook

On the other hand, some analysts are skeptical about the likelihood of a significant market disruption. ANZ Group Holdings described an Israeli attack on Iranian oil facilities as the “least likely” scenario, pointing out that such an action could strain Israel’s relationships with its allies, including the U.S., and provoke a stronger response from Tehran.

Nevertheless, options markets have started to flash warning signs as investors bet on higher oil prices. West Texas Intermediate call options, which benefit from price increases, saw their widest premium over put options in two and a half years as of Thursday’s close. Implied volatility also rose.

The crisis has begun to affect the shipping sector as well, with the cost of chartering oil tankers rising amid the recent escalation. Iran has reportedly moved some of its vessels away from a major oil loading facility.

Meanwhile, commodity trading advisors, who rely heavily on trend-following algorithms, had shifted to net long positions in Brent crude by Friday, reversing net short positions that stood at about 55% earlier in the week, according to data from Bridgewater Research.

Despite this, some market participants remain cautious. Brent Belote, who runs the energy-focused commodities trading advisory firm Kyler Capital, remarked: “The underlying physical market doesn’t reflect the $7 gain we’ve seen over the past week,
” adding that “this could provide a great opportunity to bet on a downturn if tensions ease.”

Oil Prices Post Biggest Weekly Gain Since March 2023

Oil Prices Post Biggest Weekly Gain Since March 2023

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