U.S. crude oil experienced its largest weekly gain in over a year, fueled by concerns that Israel may strike Iran’s crude facilities in response to a ballistic missile attack. West Texas Intermediate surged 9.09% for the biggest weekly increase since March 2023, while Brent jumped 8.43% for the largest weekly advance since January 2023. President Biden’s comments about discussions regarding an Israeli strike on Iran’s oil industry caused U.S. crude oil to spike about 5% on Thursday, but he later discouraged targeting oil fields on Friday, leading to an increase in oil prices.
Closing energy prices on Friday included the West Texas Intermediate November contract at $74.38 per barrel, up 0.91%, and the Brent December contract at $78.05 per barrel, up 0.55%. RBOB Gasoline was at $2.0958 per gallon, up 0.15%, and Natural Gas at $2.854 per thousand cubic feet, down 3.91%. Despite the recent gains, U.S. crude oil has risen nearly 4% year to date, while the global benchmark has increased more than 1%.
According to Daan Struyven, head oil analyst at Goldman Sachs, oil prices could rise by $10 to $20 per barrel if an Israeli strike eliminates 1 million barrels per day of Iranian production over an extended period. The extent of the price increase depends on whether OPEC uses its spare oil capacity to fill the gap. Despite the recent spike in oil prices due to geopolitical tensions, they are rebounding from a low point. Just last month, prices hit their lowest level in almost three years due to soft demand in China and OPEC+’s plans to boost production.
Struyven believes that the oil price outlook faces significant risks, as the market had not fully taken into account the escalating conflict in the Middle East until Iran’s missile attack on Israel. The geopolitical risk premium in oil markets was previously low, with Brent prices around $77 per barrel still below Goldman Sachs’ fair value estimate based on inventory levels. However, the risk premium has been limited in recent years due to a lack of sustained supply disruptions and around 6 million barrels per day of spare capacity that can offset tightness from most supply disruption scenarios.
Overall, the recent surge in oil prices due to geopolitical tensions has highlighted the potential risks in the oil market. While the possibility of an Israeli strike on Iran’s oil facilities has raised concerns, the market is recovering from a period of low prices. It remains to be seen how the situation between Israel and Iran will evolve and how it will impact global oil prices in the coming weeks.
