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Oil may top $100 if Mideast war escalates

If Iran joined an open conflict, it could cause significant market movements

A potential escalation of the Hamas-Israel war that could lead to a direct involvement of Iran would spark an increase in oil prices to record highs, analysts predicted as oil prices fell marginally during Monday trading, nearing an eight-month low on recession fears in the US.

Despite fresh escalation in tensions between Iran and Israel, oil futures extended losses in a volatile session on Monday as fears of a recession in the top oil consumer the United States offset supply worries stemming from mounting tensions in the Middle East, the world’s largest oil producing region.

Brent crude futures dropped 78 cents, or 1.0 per cent, to $76.03 a barrel by 0652 GMT, while US West Texas Intermediate crude futures were at $72.65 a barrel, down 87 cents, or 1.2 per cent. Brent and WTI tumbled more than 3.0 per cent on Friday, with both contracts marking their fourth straight week of losses — the biggest losing streaks since November.

However, traders have been actively buying call options, betting on oil prices reaching $110-$130 per barrel in November. Some traders are betting this week that oil prices could hit $110-$130 in November as Middle East risks reached a boiling point amid escalating tensions between Israel and Iran

“The market will likely need to price in a larger geopolitical risk premium until these tensions subside,” say ING’s commodities strategists Warren Patterson and Ewa Manthey.

Market pundits believe that since Iran has a more important bargaining chip than its exports as it controls one of the most important bottlenecks in the oil market — the Strait of Hormuz — a possible blockage could result in a sudden loss of supply of 20 million BRK (kilo-barrels) per day, leading to a sudden spike in oil prices not only to record highs but also to levels of $200-300 per barrel, according to some energy analysts

They said if Iran joined an open conflict, it could cause significant market movements, however as it is responsible for oil production of approximately 3.2 million BRK per day. Iran also officially exports approximately 1.5 million BRK per day, despite ongoing sanctions from the US and Europe. However, this oil mainly goes to countries that are not necessarily in alliance with the United States. The key player in this respect is, of course, China.

While a significant escalation of the situation in the form of an open war between several parties is not widely expected, there are many who doubt that peace can be achieved in the Middle East at this point. According to the Iranian media, possible peace talks may be delayed for many months. On the other hand, the White House does not seem to be saying that there will be a suspension of talks that are intended to lead to a ceasefire between Israel and Hamas.

According to market experts, in the longer term, production and demand data are on the cards in the oil market. If Opec+ continues to focus on increasing production and data from China do not show recovery, oil prices may permanently fall to around $70-80 per barrel. However, in the coming weeks, analysts expect increased volatility and prices to remain around $80 per barrel.

Last week, despite escalating geopolitical tensions in the Middle East, crude futures have declined, leaving Brent crude below $80 a barrel.

Opec maintained steady oil production in July, averaging 26.99 million barrels per day — a slight decrease of 60,000 bpd from June levels, according to a Bloomberg survey.

Venezuela and Iran accounted for most of the 60,000 bpd dip, with both countries experiencing decreased demand from China. Opec and its allies held a monitoring meeting last week as the group hopes to gradually unwind its production cuts starting in Q4. Opec has cautioned, however, that any changes to its planned supply increases will depend on market conditions.

Despite escalating geopolitical tensions in the Middle East, crude futures have declined, leaving Brent crude below $80 a barrel. This drop poses challenges for Opec+ nations, with Saudi Arabia in particular facing a four-quarter growth slump, forcing it to slash investments in key economic projects. In July, Saudi Arabia maintained its output at 9 million bpd, largely in line with its Opec+ quota. Algeria and Kuwait also stayed within their targets.