International crude oil prices rose more than three per cent on Monday, October 7, with Brent surpassing the $80 per barrel mark for the first time since August. The increased risk of a region-wide Middle East war, especially Israel and Iran, jolted investors out of record bearish positions amassed last month.

Brent crude futures last rose by $2.47, or 3.2 per cent, to $80.52 per barrel. US West Texas Intermediate (WTI) futures rose by $2.49, or 3.4 per cent, to $76.87 per barrel. Last week, Brent rose more than eight per cent, and WTI advanced by more than nine per cent week-on-week, the most in more than one year. Back home, crude oil futures last traded 2.13 per cent higher at ₹6,474 per barrel on the multi-commodity exchange (MCX).

Oil soars 10% in five days, logs biggest weekly gain in one year over Israel-Iran war; Brent sits at $78/bbl

Brent hits $80 for first time since August: What's driving crude oil?

-Israeli military rockets fired by Iran-backed Hezbollah hit Israel's third-largest city, Haifa, early on Monday. A surface-to-surface missile from Yemen in central Israel on Monday was intercepted. Israel, meanwhile, looked poised to expand ground incursions into southern Lebanon on the first anniversary of the Gaza war that has spread conflict across the Middle East.

-Analysts said there are growing concerns that the conflict may continue to escalate - not only putting Iran's 3.4 mmbopd (million barrels of oil per day) of production at risk - but creating further disruptions to regional supply.

-Commodity analysts also said Monday's gains were likely driven by money managers closing bearish bets as the risk of disruption to Middle Eastern oil supplies rose. Hedge funds and money managers had amassed record bearish bets in oil futures through mid-September on a reduced outlook for demand, primarily in China, the biggest importer of crude oil.

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-Up until a week ago, hedge funds thought traders would be testing low $60s in oil. Brent posted its biggest weekly gain since January 2023 last week on the heightened tensions in a region that accounts for about a third of global crude supply. The rally marks a stark reversal in mood after prices slumped in the third quarter on concerns about the supply and demand outlook for next year.

-The demand-side of the crude equation is still weak, and there is enough spare supply capacity within the Organization of Petroleum Exporting Countries (OPEC) to offset any losses of the Iranian flows. Market analysts have also said the current rally could be overdone.

-Analysts see a direct attack on Iran's oil facilities as the least likely response among Israel's options, noting the buffer provided by producer group OPEC's seven million barrels per day of spare capacity. Iran’s oil output has returned to almost full capacity and could be vulnerable as tensions escalate.

OPEC+ to pause planned October oil output hike of 180,000 bpd for two months

-OPEC and its allies, including Russia, known collectively as OPEC+, are due to start raising production in December after cutting in recent years to support prices because of weak global demand. OPEC has already shown that they have more oil to bring to market should it be needed, and traders are also entering a seasonal weak spot in oil demand.

-Global markets have also been re-pricing the outlook for US Federal Reserve interest rate cuts after a blowout jobs report on Friday. Traders no longer see another half-point reduction in rates this year amid expectations that the US economy will continue growing and reignite inflation, leaving little room to cut.

-Oil options markets retain their bias toward bullish calls, which profit buyers when futures gain. A gauge of implied volatility for Brent crude futures was near the highest level in almost a year, while money managers have added more net-long positions for the global benchmark.

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-China’s top economic planner will hold a press briefing on Tuesday to discuss a package of policies aimed at boosting economic growth, according to a notice from the government on Sunday. Expectations are rising among analysts for Beijing to expand public spending as part of its stimulus package.

Where are oil prices headed?

Analysts said WTI crude oil prices marked the steepest weekly gain since late March 2023. This increase was driven by concerns that Israel might target Iranian oil rigs in retaliation for Iran's recent missile launches, raising fears of disruptions to oil supplies through the Strait of Hormuz. 

“Prices are likely to remain volatile due to ongoing anxiety about a potential broader regional conflict, especially after statements from Iran's Supreme Leader Ayatollah Ali Khamenei calling for increased anti-Israel efforts,” said Kaynat Chainwala, AVP-Commodity Research, Kotak Securities.

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“The downside looks limited amid the ongoing escalation in the Middle East conflict, which may disrupt supply from the region. On chart trend remains positive till support at 6,170 holds, upside prices may test 6,300/ 6,350 & more only above 6,360,” said Pranav Mer, Vice President, EBG - Commodity & Currency Research, JM Financial Services Ltd.

Analysts added that crude oil prices experienced significant volatility last week, recovering from their lows to five-week highs, driven by heightened tensions in the Middle East and better-than-expected US non-farm payroll data. The reopening of Chinese markets this week, combined with recent stimulus measures, is expected to boost China's oil demand, further supporting prices. 

"However, gains are being capped by the upcoming OPEC+ production hike starting in December and the strengthening US dollar. We expect crude oil prices to remain volatile. Crude oil has support at $73.10–$72.50 and resistance at $74.20–$75.00. In INR, crude oil has support at ₹6,250– ₹6,180 and resistance at ₹6,420– ₹6,480," said Rahul Kalantri, VP Commodities, Mehta Equities Ltd.

 

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