(Bloomberg) -- Oil surged after Iran fired rockets at Israel, raising the risk of supply disruptions in a region that pumps a third of the world’s crude.
West Texas Intermediate jumped as much as 5.5% on Tuesday and held much of the day’s gains to settle near $70 a barrel as the market remained on edge while awaiting Israel’s potential retaliation.
Israel’s military said Iran fired more than 100 ballistic missiles at the country, though many of them were intercepted and there were no known injuries from the attack. US officials said President Joe Biden had directed the US military to aid Israel’s defense and shoot down any missiles targeting the country.
“While the near-term market panic seems to have played out, the nervous trade will likely continue for the next few days until more is known,” said Dennis Kissler, senior vice president for trading at BOK Financial Securities.
The direct involvement of OPEC member Iran in the conflict may increase the possibility of oil-supply disruptions in the region, which have so far failed to materialize during the nearly yearlong war. Iran’s output rose to a six-year high of 3.37 million barrels a day in August before easing slightly in September. The nation was the world’s ninth-largest oil producer last year, according to US figures.
Oil prices are down about 19% since the first trading day after the Oct. 7, 2023, attack on Israel.
The conflict marks one of the most significant threats to oil supplies since Russia’s invasion of Ukraine, which roiled global markets. A sustained jump in crude prices would also likely be a major concern for consumers who were just experiencing some relief as inflation eased in many parts of the world. In the US, where gas prices are a key focus for voters, both presidential candidates will also be keen to mitigate a potential spike in pump prices.
Oil speculators had been piling into the most bearish market positions on record, driven by concerns about weakening demand growth. The elevated short bets have left the market vulnerable to quick surges if those bets need to be unwound.
In the near term, crude could increase by a few more dollars per barrel as traders cover their short bets, said Rebecca Babin, senior energy trader at CIBC Private Wealth.
Tensions in the Middle East have increased after the killing of Hezbollah’s chief, Hassan Nasrallah, last week. On Monday, Israel bombed the center of Beirut and its troops have begun what it called “targeted ground raids.”
The flare-up in the Middle East has also injected volatility into the previously sleepy market. One gauge of implied volatility in Brent crude on Tuesday surged to the highest since January.
Last quarter, WTI dropped 16% on expectations that OPEC+ will make good on plans to bring back production at the same time that output from outside of the cartel is increasing. Concerns about tepid demand in China, the world’s largest crude importer, have also weighed on prices.
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--With assistance from Alex Longley.
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