Oil prices stabilize as focus shifts to developments in Israel conflict

After a significant drop on Monday, oil prices have steadied, signaling that the current conflict in Israel will remain contained for the time being. The global benchmark Brent hovered around $90 a barrel, following a 2.5% decline in the previous session, while West Texas Intermediate was close to $86. Within Israel, there is a growing call to reassess the scope of a potential ground invasion due to concerns over potential retaliation by Hezbollah militants in Lebanon, the fate of approximately 200 hostages in Gaza, and the risk of Israeli military casualties.

Despite the absence of immediate disruptions in the Middle East, which is responsible for about one-third of the world’s crude oil supply, there has been a reduction in the war-risk premium. However, Brent remains approximately 7% higher than before the October 7th attack. Key factors for a potential further surge in prices include increased compliance checks on sanctioned Iranian oil by Washington and potential disruptions to crucial shipping routes by Tehran.

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The U.S. has announced plans to deploy additional military forces to the Middle East in an effort to deter groups like Hezbollah from seeking to expand the conflict. In a separate development, Hamas released two more hostages, both elderly women, from the Gaza Strip on Monday.

Priyanka Sachdeva, a senior market analyst at Phillip Nova Pte, commented, “Diplomatic efforts in Gaza are suggesting the possibility of de-escalation, which is impacting the momentum in oil prices. Markets are also eagerly awaiting further indicators of the U.S. economy to assess domestic demand for fuel.”

Traders had been increasing their bullish positions in oil due to the conflict. In the week ending October 17th, money managers raised their bets on higher Brent crude prices by the most in seven years. Much of the heightened oil trading activity in recent days has been focused on the options market, with a record number of Brent calls changing hands over the past week.