Market Analysis

Oil prices increase by more than 2% as tensions in the Middle East rise

Amos Simanungkalit · 02 Oct 20246.8K Views

Oil prices surged by over 2% on Wednesday due to escalating tensions in the Middle East, which raised concerns about potential disruptions to crude production in the region. This follows Iran's most significant military strike against Israel to date.

Brent crude futures increased by $1.63, or 2.2%, reaching $75.19 a barrel, while U.S. West Texas Intermediate (WTI) crude jumped $1.70, or 2.4%, to $71.53 as of 0755 GMT. Earlier in the session, WTI had risen more than $2.

Both benchmarks saw a significant rise on Tuesday, climbing over 5% before ultimately closing about 2.5% higher.

Iran announced early Wednesday that its missile attack on Israel was concluded unless provoked further, while Israel and the U.S. vowed to retaliate against Tehran, escalating fears of a broader conflict.

"This could involve damaging or destroying Iran's oil facilities," warned Tamas Varga from oil broker PVM.

Tehran also stated that any Israeli retaliation would result in "vast destruction," and Varga pointed out that Iranian or allied retaliation could target Saudi oil facilities, reminiscent of attacks in 2019, or even lead to the closure of the Strait of Hormuz. "Any of these scenarios would irreparably push oil prices significantly higher," he added.

In a related development, the Israeli military dispatched regular infantry and armored units to participate in ground operations in southern Lebanon against Iran-backed Hezbollah.

The United Nations Security Council has scheduled a meeting to discuss the situation in the Middle East for Wednesday, while the European Union has called for an immediate ceasefire.

Iran's oil production reached a six-year high of 3.7 million barrels per day (bpd) in August, according to ANZ analysts.

"Any major escalation from Iran could draw the U.S. into the conflict," noted Capital Economics. "Although Iran contributes roughly 4% of global oil output, an important factor will be whether Saudi Arabia decides to boost production if Iranian supplies are disrupted."

Later on Wednesday, a panel of ministers from OPEC+, which includes Russia, will convene to assess the market, with no changes to policy anticipated. The group plans to increase output by 180,000 bpd per month starting in December.

"Any indication of production increases could alleviate concerns about supply disruptions in the Middle East," according to ANZ analysts.

However, Saudi Arabia's oil minister cautioned that oil prices could plummet to as low as $50 per barrel if OPEC+ members fail to adhere to agreed production limits, as reported by the Wall Street Journal.