Brent crude oil prices soared past $80 per barrel, reaching their highest level since August, due to escalating tensions in the Middle East that have sparked speculation about a potential Israeli attack on Iranian oil infrastructure.
On Monday, the global benchmark index rose by 3.7%, continuing the upward trend from last week, which was fueled by external speculation on how Israel might respond to Iran's missile strike on the previous Tuesday. West Texas Intermediate (WTI) crude also rose by 3.7% at one point, breaking through $77 per barrel. President Joe Biden stated last Friday that he was unaware of when Israel would respond, "I would consider other alternatives rather than attacking oil fields."
Rebecca Babin, a senior energy trader at CIBC Private Wealth Group, said, "Anxiety is intensifying. The longer we wait, I think fear will accumulate, much like when you're at the top of a roller coaster, anticipating the descent."
Currently, the situation in the Middle East remains tense, with Hamas launching a barrage of rockets towards Tel Aviv, and Israel reinforcing troops in northern Gaza over the weekend, while continuing airstrikes and limited ground exercises in Lebanon. Iran's oil production has returned to nearly full capacity, but it may be affected as tensions escalate.
Brent crude posted its largest weekly gain since January 2023 last week, due to heightened tensions in the Middle East, which accounts for about one-third of the global crude oil supply. This rebound marks a significant reversal in market sentiment. Previously, oil prices had plummeted in the third quarter due to concerns over supply and demand prospects for the coming year. Goldman Sachs analysts, including Daan Struyven, predicted in a report that Brent crude prices could soar to $90 if Iranian oil supplies were disrupted.
Additionally, traders cited a Goldman Sachs report stating that if Brent and West Texas Intermediate (WTI) crude prices rise significantly, algorithm-driven traders known as Commodity Trading Advisors (CTAs) could unleash up to $40 billion in buying. Before the latest tensions emerged, these funds and other speculators had accumulated a record amount of short positions and have been rapidly closing them out over the past week.
On the other hand, following the explosive job growth report released last Friday, global markets are also repricing the prospects of a Federal Reserve rate cut. Traders no longer believe the Fed will cut rates by another 50 basis points this year, as they anticipate continued U.S. economic growth and a rekindling of inflation, leaving little room for rate cuts.
The potential supply disruptions caused by Hurricane "Milton" in the Gulf of Mexico also keep investors on high alert. Chevron (CVX.US) evacuated personnel from a platform and shut down production on Monday.
The oil options market continues to favor calls. An indicator measuring the implied volatility of Brent crude is near its highest level in nearly a year, while fund managers have increased their net long positions in this global benchmark crude oil.
According to a notice issued on Sunday, China's top economic planning agency, the National Development and Reform Commission, will hold a press conference on Tuesday to discuss a package of policies aimed at promoting economic growth. Analysts increasingly expect China to expand public spending as part of its economic stimulus plan.TC ICAP energy expert Scott Shelton stated: "The market is severely lacking 'risk absorbers' willing to take on risk, as most traders have had a tough year and are not willing to take on significant volatility risk before the end of the year."