Crude oil jumps on fresh supply risks with the Middle East in focus

Global Market Quick Take: Europe
Macro Digest: Middle East in Focus
Commodity Weekly (from Friday): Yield surge drives steep crude and gold correction 

• The oil market will be focusing on Iran and the impact on supply from a potential Israeli response
• Apart from crude oil and gold, energy shares are the only clear gainers on what is a ‘risk off’ morning for equity markets
• Speculators hold a relatively lean position in Brent potentially strengthening the upside price response to an escalating geopolitical situation.

Crude oil futures trade up +3% while gold has found a haven bid after Hamas’ attack on Israel raised concerns about stability in the Middle East, particularly with focus on Iran after the WSJ reported that Iran helped plot the attack over several weeks. The situation is tense and with some calling this Israel’s 9/11 moment, the risk of an escalation is still high as Israel and potentially also the US responds. But for now, with no clear impact on supply, the first buying response has been driven by traders adding a geopolitical risk premium back in the price and fresh demand following last week’s strong correction which drove a significant amount of long liquidation, especially in Brent, the global benchmark.

The market's foremost concern revolves around potential disruptions in supplies from regions like Iran. The ongoing conflict has the potential to worsen tensions between the involved countries, especially considering President Joe Biden's unwavering commitment to supporting Israel. At present, there is no immediate threat to the oil supply, but the market is understandably apprehensive. Often, market sentiment and concerns can exert greater influence than the actual underlying fundamentals.

Crude oil spiked $4 on the opening but for now with no impact on supply, Brent remains below $90 with the first buying response being driven by traders adding a geopolitical risk premium back in the price and fresh demand following last week’s strong correction which drove a significant amount of long liquidation, especially in Brent, the global benchmark. Notably, one of the most significant surges in exports this year has apart from US shale, been attributed to Iran where production and exports have risen as the US turned a blind eye to Iran bypassing American sanctions. As the result its production has risen by close to 600,000 barrels during the past year while crude stored on- and offshore has been sold into market, thereby mitigating some of the tightness being orchestrated by Saudi Arabia and Russia. Should the spotlight turn towards Iran, there's a possibility of stricter sanctions being imposed, potentially leading to supply constraints and tightening conditions within the market.