Oil Edges Higher as Traders Assess Shifting Risks in Middle East

(Bloomberg) -- Oil edged higher after Israel’s killing of Hezbollah’s leader, Hassan Nasrallah, with the market waiting to see how Iran will respond.

Brent for December — the most active contract by daily volumes — was around $72 a barrel, while West Texas Intermediate was above $68. Nasrallah was killed in an air strike on Lebanon’s capital Beirut, dealing a major blow to the group and its sponsor Tehran. Israeli jets also bombed targets in Yemen after attacks on the country this month by Iran-backed Houthi rebels.

Crude remains lower this year as the heightened tensions in the Middle East have so far failed to escalate into an all-out confrontation that could threaten oil supplies from the region. At the same time, global production remains ample, with OPEC+ planning to relax output curbs, and China’s slowdown has hurt demand, although Beijing has recently added stimulus.

“The oil market has become increasingly numb to developments in the Middle East,” said Warren Patterson, head of commodities strategy at ING Groep NV in Singapore. “The conflict has gone on for more than a year with no impact on oil output, while OPEC continues to sit on a large amount of spare capacity. Instead, support measures coming through from China appear to be what’s providing support.”

Iran appears to be in no rush to escalate the conflict with Israel, which has unfolded against the backdrop of the war in Gaza between the Jewish state and Hamas, which is also sponsored by Tehran. President Masoud Pezeshkian stopped short of pledging a direct attack on Israel and struck a relatively restrained note in a speech at the United Nations.

Since the outbreak of the war in Gaza almost a year ago, oil traders have been been on alert for actual disruptions to supply, especially at times of heightened tensions between Israel and Iran. While Houthi attacks in the Red Sea have forced some tankers to go around southern Africa — lengthening voyages — crude output from the region has been largely unscathed.

The latest shift in the course of the Middle East conflict did spur heavier-than-usual trading. More than 70,000 contracts across the Brent futures curve changed hands by noon in Singapore.

Timespreads, meanwhile, point to a less tight market, with Brent’s prompt spread — the difference between the two nearest contracts — narrowing. The gap was last 45 cents a barrel in backwardation, compared with 69 cents a week ago.

“Some oil market participants will look past this escalation given that there still has not been a major physical supply disruption and Iran has not demonstrated any appetite to enter this nearly yearlong conflict,” RBC Capital Markets LLC analysts including Helima Croft said in a note. “And yet, it is extremely difficult to see where this regional conflict is headed, and whether this is the beginning of the end, or the end of the beginning.”

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