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Oil prices edge higher as markets remain on tenterhooks

Global oil prices have already soared 9% since Iran's attack on Israel

Oil prices edged higher on Thursday as markets remained on tenterhooks amid uncertainties about Middle East supply risks and a spike in US demand caused by hurricane Milton.

Brent crude futures rose 58 cents, or 0.8 per cent, to $77.16 a barrel by 0847 GMT. U.S. West Texas Intermediate (WTI) futures were up 61 cents, or 0.8 per cent, at $73.85.

In the US, the world's largest oil producer and consumer, Hurricane Milton made landfall in Florida, where about a quarter of fuel stations sold out of gasoline, helping to support crude prices.

Energy market analysts said a full-scale conflict between Israel and Iran could upend the international energy supply and send shock waves throughout the global economy, experts warn.

"Major disruption of regional oil and gas exports is likely to have a material impact on the global economy," said Farzan Sabet, senior research associate at the Geneva Graduate Institute.

Global oil prices have already soared 9.0 per cent since Iran's attack, which came amid Israel's yearlong war in the Gaza Strip and its invasion of southern Lebanon earlier this month.

Energy analysts said an even more significant disruption to supply from the Middle East could lead to triple-digit oil prices although they believe attacks on oil infrastructure in other producers in the region or the closure of the Strait of Hormuz are low-probability events. Swedish bank SEB has warned that crude futures could rally to more than $200 a barrel in an extreme scenario of Israel targeting Iran’s oil facilities.

“In one extreme tail risk scenario, the crisis in the Middle East may disrupt 30 per cent of the world’s seaborne crude oil flows and 20 per cent of global LNG supply – causing energy prices to skyrocket. In another scenario, Opec+ may decide to pivot its strategy in 2025 towards a long-run equilibrium focused on strategically disciplining non-Opec+ supply (and fortifying internal cohesion), through ramping up its barrels in what is already to be a surplus market next year – causing energy prices to plummet,” wrote Ehsan Khoman, Soojin Kim, analysts at MUFG.

They argued that in the immediate term, while the sizable 7.0 per cent advance in Brent crude following the October 1 Iranian attacks on Israel may appear significant, geopolitical risk premium gauges remain negligible for several reasons.

“First, Opec+ is sitting on a substantial 6m b/d of spare capacity that can withstand potential supply-side tightening shocks. Second, should core Opec+ producers have an inability to export their barrels due to potential disruptions to tanker traffic in the Strait of Hormuz, there will likely be a significant and coordinated release of Strategic Petroleum Reserves (SPR) by the US, Europe and Japan to prevent a much larger sustained price spike and ensure the security of supply,” the MUFG analyst said.

They observed that global oil markets are contending with competing forces. “On the one hand, Middle East driven geopolitical supply-side risks is supporting prices. On the other hand, apprehensions surrounding the tepid physical market threatens to drag prices lower. Near-term, should Israel’s reprisal target Iran’s mid/upstream energy infrastructure (more significant to global markets), than its downstream assets (more significant for the domestic Iranian market), then prospects of another tit-for-tat retaliatory move by Iran may witness oil prices leapfrog higher,” Khoman and Kim wrote.

Energy market experts said even a major disruption to the flow of oil and gas from the Middle East stemming from an all-out Israel-Iran conflict would not cause the global economy to spiral out of control. That is largely due to the rise of the United States as a major oil and gas supplier as well as the decreasing global reliance on fossil fuels. The market has a not-so-secret cushion that could help offset any loss of output. Opec+ has 5.8 million bpd spare capacity to compensate for Iran's 1.7 million bpd of discount sanction barrels, they noted.