Oil prices extend gains as markets wait for Israel's retaliation against Iran
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Oil extended its gains on Monday following its biggest weekly gain in more than a year in anticipation of an Israeli retaliation against Iran after last week's missile strike.
Separately, Hurricane Milton headed towards Florida off the gulf of Mexico strengthened to Category 5, also helping fuel higher crude prices.
West Texas Intermediate (CL=F) advanced more than 3% to close at $77.14 per barrel after gaining more than 9% last week. Brent (BZ=F), the international benchmark price, also advanced more than 3.5% to settle at $80.93.
Tel Aviv has vowed to strike back after Iran launched some 200 ballistic missiles toward Israel last Tuesday. Oil futures have been moving on speculation of whether that retaliation will include targeting Iran's oil infrastructure.
"The Iranian military has responded by saying any attack from Israel would trigger yet a stronger response from Iran, so the geopolitical stages effect on crude continues to grow," Dennis Kissler, BOK Financial's senior vice president of trading, wrote on Monday.
During Friday’s session, oil pared gains after President Biden discouraged Israel from targeting Iran’s oil fields. The remarks came a day after crude jumped more than 5% after the president seemed to suggest that the US was discussing such a possibility with Israel.
Iran produces more than three million barrels of oil a day. Interrupting supply would send prices higher while cutting off shipments on the Straight of Hormuz, a chokepoint for crude shipments, would cause even more upward pressure, according to analysts.
"If there's a stranglehold there, and there's a serious blockage or serious delays, we should clear $80 [for Brent]. That is going to push oil prices significantly higher. That is a game changer," Blue Line Futures founder Bill Baruch told Yahoo Finance last week.
However, analysts point to spare capacity expected to come onto the market from the Organization of the Petroleum Exporting Countries (OPEC). The oil alliance has indicated it will start unwinding voluntary production cuts in December.
Under two hypothetical scenarios where Iran's oil supply is interrupted by either 2 million or 1 million barrels per day, Goldman Sachs sees Brent reaching a peak of $90 or the mid-$80s, respectively, provided that OPEC rapidly offsets the shortfall.
The firm predicts in the absence of major disruptions to oil supply in the Middle East, Brent will continue to trade in the $70-$85 range, with an average price of $77 per barrel in the fourth quarter of 2024.