Oil Prices Surge by Over 3% Amid Middle East Tensions

By Shariq Khan
NEW YORK (Reuters) – Oil prices settled more than 3% higher on Monday, with Brent surpassing $80 per barrel for the first time since August as the increased risk of a region-wide Middle East war jolted investors out of record bearish positions amassed last month.

Brent crude futures rose by $2.88, or 3.7%, to settle at $80.93 per barrel. U.S. West Texas Intermediate futures advanced by $2.76, or 3.7%, to $77.14 per barrel.

Last week, Brent rose more than 8% and WTI advanced by more than 9% week-on-week, the most in more than a year, after Iran's October 1 missile barrage against Israel raised concerns that the response from Israel would target Tehran's oil infrastructure.

If that occurs, oil prices could rise by another $3 to $5 per barrel, said Andrew Lipow, president of Lipow Oil Associates.

Rockets fired by Iran-backed Hezbollah hit Israel's third-largest city, Haifa, early on Monday. Israel, meanwhile, appeared ready to expand ground incursions into southern Lebanon on the first anniversary of the Gaza war that has spread conflict across the Middle East.

Analysts at Tudor, Pickering, Holt & Co expressed concerns that the conflict could escalate further, not only threatening Iran's 3.4 million barrels of oil per day (mmbopd) production, but also creating further disruptions to regional supply.

Monday's gains likely stemmed from money managers closing bearish bets on the rising risk of disruption to Middle Eastern oil supplies, according to UBS analyst Giovanni Staunovo. Hedge funds and money managers had accumulated record bearish bets in oil futures through mid-September due to a lower outlook for demand, primarily in China, the biggest crude oil importer.

John Kilduff, partner at Again Capital in New York, noted, "There's a lot of short-covering in the market that started last week and is still continuing. It's a buy now, ask questions later kind of market."

However, he cautioned that this fear-driven rally leaves oil prices vulnerable to significant downside if Israel refrains from attacking Iranian oil infrastructure, which could cause prices to drop by $5 to $7 per barrel, according to Kilduff and Lipow.

Brent Belote, founder of a commodities-focused hedge fund, said, "Up until a week ago, I had thought we would be testing low $60s in oil." He added that demand remains weak, and the Organization of Petroleum Exporting Countries (OPEC) has sufficient spare supply capacity to offset any disruptions to Iranian exports.

OPEC and its allies, known collectively as OPEC+, are expected to start raising production from December after previously cutting output to support prices due to weak global demand. However, according to Lipow, Brent crude prices will likely need to be closer to $90 or above for OPEC+ to consider increasing supplies.