The Middle East Conflict: Escalation, Effect on Oil Prices and Potential Uncertainty Ahead

The Middle East Conflict: Escalation, Effect on Oil Prices and Potential Uncertainty Ahead 

The escalation of geopolitical tensions in the Middle East is undoubtedly raising concerns about global oil supply disruptions and destabilising prices. Despite mixed performance in the oil markets – as events seem to unfold by the minute – investors around the globe remain braced for elevated volatility. 

Conflict Timeline: A Year of War and Fears of Further Escalation

Although the conflict began when Hamas’ militants stormed across Gaza’s border into Israel, killing about 1,200 people and taking more than 250 hostages, the situation has escalated. Israel, led by Prime Minister Benjamin Netanyahu, is now involved in conflicts on at least four fronts: Gaza, Lebanon, Yemen, and Iran.

In response to Hamas’ attack last October, Israel launched an extensive airstrike campaign on Gaza, followed by a ground invasion three weeks later. To date, more than 41,000 Palestinians have been killed, with the war in Gaza still ongoing. 

Fast forward to April this year, Israel attacked the Iranian consulate in Damascus, Syria, which resulted in the killing of 13 people, including Islamic Revolutionary Guard Corps (IRGC) commander Major General Mohammad Reza Zahedi. Iran responded with a missile and drone barrage targeting Israel, which was largely intercepted by the Israeli Defense Force (IDF). Noteworthy is the fact that this was the first time that Iran had fired missiles directly into Israeli territory. Three months later, Hamas’ political chief, Ismail Haniyeh, was assassinated in Tehran. 

The day after Hamas’ attack last October, Lebanese armed group Hezbollah and Israel began exchanging fire across the Lebanon-Israel border. This culminated in Israel launching airstrikes on around 1,600 Hezbollah targets across Lebanon last month. In four days, more than 700 Lebanese people were killed, including Hassan Nasrallah, Hezbollah’s leader since 1992. Hezbollah retaliated last week with drone air attacks on a naval base in south Haifa. Following, Israel commenced its ground invasion of Lebanon on Tuesday, 2 October.

Israel has also been conducting airstrikes in Yemen (in July and a few days ago) on what it claims are Houthi targets.

Although the US has maintained that it wants to broker a ceasefire deal between Israel and Hamas that would end the war in Gaza and also calls for a truce between Israel and Lebanon – all efforts have failed. In addition, US President Joe Biden’s comments yesterday did not make clear Washington’s stance as he commented that the US is discussing the possibility of Israeli strikes on Iran’s oil infrastructure. 

What is Behind Oil’s Tame Response?

History shows that oil prices tend to appreciate in times of unrest, particularly conflict involving Middle Eastern countries. While recent events have certainly seen days (some weeks) of upside in the oil complex, bids for oil have been lacklustre. Brent Crude and WTI Oil remain trading off lows not seen since late 2021.

Some desks claim the lack of demand is due to active short positions in the market. This is based on several factors, including fears that China’s new stimulus package may not have the desired effect, mounting tensions in Iran (note that Iran exports approximately 1.5 million barrels of oil daily to China), as well as slowing global economies (particularly in the West).

Different Ball Game This Week: Oil Prices Soar

However, this week has been a different ball game, and all eyes are on what happens next following Iran’s missile attack on Tuesday. Notably, the more involved Iran becomes in the conflict, the greater the possibility of supply disruptions.

Brent Crude and WTI Oil caught sizeable bids, up circa 9.0% this week (as of writing) amid escalating tensions between Israel and Iran. This was particularly evident on Thursday. Oil prices rose following President Joe Biden telling reporters that a potential retaliatory response against Iran was under discussion for the missile attack, triggering the largest one-day gain in the price of Brent Crude since October last year.  It is also relatively apparent through recent commentary that the US may not have much influence over Israel’s actions.

An attack on Iran’s oil facilities would have wide-reaching implications for global partners, and if production were severely limited, supply would take a hit. That said, OPEC has sufficient capacity to cushion a blow of over 5 million barrels per day. According to ANZ analysts, an attack on Iran’s oil infrastructure would be the least likely response; were it to come to fruition, though, some analysts forecast record highs in oil.

Correspondingly, another factor behind rising risk premiums is raised concerns about the Israel-Iran conflict impacting the Strait of Hormuz – the strait between the Gulf of Oman and the Persian Gulf. This sea passage stretches around 30 miles, and any meaningful interruption would trigger a spirited bid in oil prices on supply disruption fears.

FP Markets Analyst Aaron Hill commented: ‘The situation in the Middle East remains fluid and uncertain. This week, demand in the oil complex has been noteworthy, clearing offers around key levels. Given the ambiguity surrounding current affairs and the ever-growing possibility of retaliatory attacks, nonetheless, we will likely see some shorts unwinding their positions that underpin oil prices over the coming weeks. Furthermore, the recent upside has powered the possibility of an early uptrend’.

Early Uptrend in Play?

From the daily timeframe of WTI Oil, chart studies reveal an early trend reversal to the upside: a fresh higher high was established following the higher low of US$66.36. Couple this with price action manoeuvring north of the 50-day simple moving average (SMA) at US$72.73 as well as the channel resistance, extended from the high of US$84.49, this is a market echoing the possibility of further outperformance.

Technical traders will look for daily flow to remain above the recently breached channel resistance today, marking a fourth straight day in the green for WTI Oil. Upside objectives from current levels include the 200-day SMA at US$77.34 (converges closely with a 1.618% Fibonacci projection ratio and a 61.8% Fibonacci retracement ratio around US$77.50ish), resistance coming in at US$79.92, which shares chart space with a descending resistance line, taken from the high of US$94.99.

DISCLAIMER:

The information contained in this material is intended for general advice only. It does not take into account your investment objectives, financial situation or particular needs. FP Markets has made every effort to ensure the accuracy of the information as at the date of publication. FP Markets does not give any warranty or representation as to the material. Examples included in this material are for illustrative purposes only. To the extent permitted by law, FP Markets and its employees shall not be liable for any loss or damage arising in any way (including by way of negligence) from or in connection with any information provided in or omitted from this material. Features of the FP Markets products including applicable fees and charges are outlined in the Product Disclosure Statements available from FP Markets website, www.fpmarkets.com and should be considered before deciding to deal in those products. Derivatives can be risky; losses can exceed your initial payment. FP Markets recommends that you seek independent advice. First Prudential Markets Pty Ltd trading as FP Markets ABN 16 112 600 281, Australian Financial Services License Number 286354.