Oil surges as Israel conflict reignites Middle East volatility

Any retaliation against Tehran – amid reports that it helped to plan the attacks – could endanger the passage of vessels through the Strait of Hormuz, a vital passageway that transports much of the world’s crude and which the Iranian government previously threatened to close. Iran denied on Monday that it was involved in the assault.

The surge after the attacks added a fresh bout of volatility to a market that has seen sizable swings over the last month. In late September, Brent was on course to rally up to $US100 a barrel as cuts from Saudi Arabia and Russia tightened the market, before retreating sharply last week as concerns about consumption and financial flows pulled prices lower.

Early trading on Monday brought a flurry of bullish activity in the Brent options markets, with call options that profit from higher oil prices outpacing – by more than three-to-one – bearish put options.

The conflict may have far-reaching consequences for crude. Banks had a wide range of takes on the potential impacts:

• Citigroup said the hostilities reduce expectations that Saudi Arabia will cut or eliminate its 1 million barrels-a-day of output curbs. Risks are also growing that Israel will attack Iran, analysts including Ed Morse said.
• Morgan Stanley said that they thought the impact of the conflict would be limited. For now they do not expect a spillover into other countries, meaning there will be a muted longer-term impact on crude prices.
• Société Générale said heightened geopolitical tensions could add $US5-$US10 risk premium to crude prices.
• RBC Capital Markets analysts including Helima Croft said Israel will likely escalate a long-running shadow war against Iran, but Tehran’s response to such a move will be less clear.

Bloomberg