Oil Prices Retreat After Weekly Surge Amid Middle East Tensions

SINGAPORE (Reuters) – Oil prices pared gains in early trade on Monday following their largest weekly rise in over a year, fueled by escalating tensions in the Middle East.

Brent crude futures dropped 43 cents, or 0.5%, to $77.62 per barrel by approximately 0015 GMT. U.S. West Texas Intermediate crude futures fell 35 cents, also 0.5%, to $74.03 per barrel.

Last week, Brent gained over 8% — the biggest increase since January 2023 — while WTI rose 9.1%, marking its most significant weekly gain since March 2023.

Tina Teng, an independent market analyst, attributed the retreat to profit-taking following last week’s price surge.

“However, the oil market is likely to remain under upside pressure due to fears concerning Israel’s possible retaliation against Iran. Geopolitical tensions are significantly influencing market trends,” she stated.

Israel launched strikes against Hezbollah targets in Lebanon and the Gaza Strip on Sunday, approaching the one-year anniversary of Hamas’ attacks on Israel, which sparked the ongoing conflict. Israel’s defense minister remarked that all retaliation options against Iran are being considered.

This escalation followed Iran’s missile strike on Israel last week in response to Israeli actions in Lebanon and Gaza.

In the latest developments, Israeli police reported that Hezbollah rockets struck Haifa, Israel’s third-largest city, early Monday.

Despite the recent surge in oil prices, ANZ Research noted that the conflict’s effect on oil supply is expected to be minimal.

The research pointed out that a direct strike on Iran’s oil facilities is unlikely, as it would alienate international partners. Disrupting Iran’s oil revenue may provoke a fierce retaliatory response as Iran would have less to lose.

Recent years have seen a reduced influence of geopolitical events on oil supply, leading to a smaller geopolitical risk premium in the market. Additionally, OPEC maintains 7 million barrels per day of spare capacity as a cushion.

OPEC and its allies, including Russia and Kazakhstan, possess millions of barrels in spare capacity, having cut production to support prices due to weak global demand.

The producer group has enough spare oil capacity to cover a total loss of Iranian supply if Israel were to target Iranian facilities but would face challenges if Iran retaliated against installations in Gulf nations.

At its meeting on October 2, OPEC and its allies (OPEC+) decided to maintain their oil output policy, including plans to increase production starting in December.