It has been a tumultuous week in the oil markets, as the spotlight has been squarely on the sudden onset of the Israel-Palestine war.

Both Brent and WTI surged as financial markets grappled with deep uncertainty and potential supply spillovers amid the brutal violence.

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On Friday, October 13, Brent surged to a high of $91.00 (£74.88) per barrel, rising nearly 5.70% on the day.

During the week, Brent gained 7.50%, the sharpest increase since February 2023.

At the same time, WTI touched a high of $87.83 per barrel on Friday, gaining well over $4.00 since the markets opened, as Israeli forces pushed forward into Gaza.

For the week, WTI prices were up by approximately 6.00%.

Monday prices

In early trading on Monday, oil prices reflected a different story.

Brent oil futures (December contract) declined sharply from a high of $91.06 to $90.80, registering a fall of 0.30%.

However, since the trough, prices have recovered and are now trading nearly level with last week’s close, and are up 0.10% at the time of writing.

Source: Investing.com

Similarly, the WTI futures fell by 0.40% to a low of $86.30, but have since recovered to $86.45, and are trading 0.12% above the previous close.

Key developments

Crucially, investors are assessing the cause of Israel’s full-scale invasion not having begun even after the expiry of the 24-hour deadline given to residents of North Gaza to flee the region.

Amid the atrocities, reports suggest that residents are trapped in the Gaza Strip, and unable to leave due to blockades.

Daniel Kurtzer, a former U.S. ambassador to Israel believes that Israel’s invasion of Gaza could begin any moment, but,

 

…it could also happen in stages with additional incursions by small groups of Israeli soldiers…

President Biden has urged Israel to reconsider its invasion plans which would further heighten tensions in the Middle East.

US Secretary of State Anthony Blinken is currently visiting the Middle East in a bid to diffuse tensions and to negotiate the safe return of Israeli hostages who are held in Gaza.

Coupled with Israel not being a significant producer of oil, Blinken’s negotiations, and the uncertainty around a full invasion, oil prices may be kept relatively subdued for the time being.

Iran

Markets are primarily concerned with the potential for US sanctions on Iran, the fifth-largest oil producer which would further choke global oil supplies and threaten wider energy security.

Iran is widely considered a key backer and financier of militancy in Gaza, with Rep. Kevin McCarthy (R-Calif.) stating that the United States should,

 

…stop Iran from being able to produce the oil.

However, Deputy National Security Adviser Jon Finer stressed,

 

Iran is broadly complicit in these attacks for having supported Hamas… (but at present, there is) no evidence of direct support (for this attack)

Ann-Louise Hittle, vice president of oil markets at Wood Mackenzie expects that sanctions enforcement will remain challenging since major buyers of Iranian oil such as China find ways to work around restrictions given the steep discounts that the oil producer is prepared to offer.

In addition, many of these channels are relatively insulated from the US financial system which allows ‘barter agreements’ to take shape.

The downside risks on oil prices may have been capped by new US sanctions on tanker owners who transport Russian oil above the stated price cap of $60.00 a barrel.

What to expect

After a tremendous run-up in oil prices in the previous week, investors and traders have paused for a breath given the delay in Israel’s expected full-scale invasion of Palestine’s Gaza.

Earlier in the session, crude prices, both Brent and WTI dipped significantly, but have recovered and are now trading sideways, as financial markets continue to track developments in the Middle East.

The key concern for investors is the possibility that the fighting will engulf the broader Middle East, which accounts for 48.30% of global oil reserves, as per a report by Anadolu Ajansı.

Hiroyuki Kikukawa, president of NS Trading, a unit of Nissan Securities, noted,

 

The impact that may involve oil-producing countries has been factored into the prices to some extent…

However, an Israeli invasion could be triggered at a moment’s notice, and if so, oil prices will surge higher to at least $100.00 a barrel.

For a longer-term perspective on the supply-demand balance in energy markets, traders are primarily concerned with the possibility of sanctions on Iran’s current exports of approximately 1.60 million barrels a day.

In a recent article, I also covered the possibility of crude prices skyrocketing to as high as $150.00 a barrel, if Middle East tensions boil over, drawing other countries into the war.

To gauge the pressure on global demand, markets will be closely watching China’s Q3 GDP data which shall be published on  October 18, the US Energy Information Agency’s data on crude oil inventories on October 19, and Japanese inflation data which is due on October 20.

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