• Iran launched missile strike at Israel in retaliation for the recent assassination of Hezbollah leader.
• Concerns that Israel may target Iranian oil infrastructure are rising.
• The potential for a direct conflict between Iran and Israel could jeopardise the stability of oil supplies from the Middle East.

Limited Market Disruption So Far

Since the Israel-Hamas conflict started in October 2023, disruptions to the global oil market have been limited. Despite extended OPEC+ output cuts, record oil production from the United States and weak demand from China have kept oil prices supressed.

However, the latest developments in the Middle east could mark a significant turning point, following the extended phase of geopolitical risk ignorance, during which traders largely dismissed the potential for oil supply disruptions linked to the ongoing conflicts in the Middle East and Ukraine.

Rising Threat to Oil Markets Amid Escalating Middle East Conflict

Iran’s recent missile strikes against Israel, in retaliation for Israeli operations against Hezbollah and Iranian targets in Lebanon, could prompt a severe Israeli response. The latest developments present a real threat to escalation of the conflict in the Middle East and crude oil supplies.

The potential for a direct conflict between Iran and Israel has raised concerns over the stability of oil supplies from the Middle East, a region critical to global energy markets. As Israel shifts its focus from Gaza to Lebanon and Iran, the conflict is entering a new phase.

Iranian Oil Infrastructure at Risk

Iranian oil infrastructure could become a key target for Israel following their recent missile attack. Tensions have escalated as Iran launched a ballistic missile strike on Israel in retaliation for the targeted killing of Hezbollah leader Hassan Nasrallah and an Iranian commander in Lebanon.

Israel has already signalled that it may launch a „disproportionately large“ retaliation following the Iranian missile strikes. Israeli Prime Minister Benjamin Netanyahu stated that Iran has „made a big mistake“ and would face severe consequences.

Iran is the third-largest producer in OPEC, currently producing around 3.7 million barrels per day, according to Energy Information Administration (EIA) data and provides 4% of the global oil supply. An actual attack on Iran’s oil facilities, or tighter sanctions, could push oil prices sharply higher. However, this raises the question of whether Saudi Arabia might increase production to offset any potential shortfall in Iranian oil output.

Possible U.S. Involvement Could Increase Volatility

The U.S. has also condemned Iran’s actions, with Defence Secretary Lloyd Austin affirming that Washington is „well-postured“ to defend its interests in the region. The risk of U.S. involvement in the conflict looms large as a significant escalation could draw Washington into the war. A potential U.S. involvement could further destabilize the oil market, raise volatility, and push crude prices higher.

U.S. Crude Inventory Data Reflects Market Imbalance

In addition to geopolitical tensions, U.S. crude oil inventories unexpectedly rose by 3.89 million barrels in the latest Energy Information Administration (EIA) report, compared to a forecasted decline of 1.5 million barrels. This inventory increase signals weaker-than-expected demand for crude oil. Should this trend of rising inventories continue, it may add another layer of uncertainty to an already complex global energy market.

Source: TradingView

Technical Analysis

WTI prices experienced a sharp sell off since July, amid signs of weak demand from China, OPEC+ plans to gradually increase output from December, and record U.S. production.

Oil prices surged strongly on Monday as fears of supply disruptions in the oil-rich Middle East gripped traders and investors. The latest developments in the region, coupled with growing uncertainty, are likely to increase the volatility in the oil market.

From a technical analysis perspective there is strong likelihood that WTI prices have bottomed at $65.20 and could break its key resistance of $72.50. Such breakout would confirm that a new uptrend has started which could trigger a sharp and impulsive rally to $78.00 – $80.00 in the short-term.

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