A general view of the Isfahan Refinery, one of the largest refineries in Iran and considered the country's first refinery in terms of the variety of petroleum products, in Isfahan, Iran, on November 8, 2023.
Fatemeh Bahrami | Anadolu | Getty Images
Oil prices have risen by more than $5 a barrel since the start of the week as fears grow that Israel could launch an attack on Iran's energy infrastructure.
The rally, which has seen crude oil futures gain about 8% so far this week, has surprised many market watchers in that it appears to have been somewhat muted given what is at stake.
Energy analysts have questioned whether oil markets are becoming too complacent about the threat of an escalating conflict in the Middle East, particularly given that the fallout could disrupt oil flows from the key export region. Iran, a member of OPEC, is a major player in the global oil market. It is estimated that up to 4% of global supplies could be at risk if Israel targets Iran's oil facilities.
According to Goldman Sachs, a sustained decline in Iranian production could send oil prices up by $20 a barrel, while Swedish bank SEB has warned that crude oil futures could rise above $200 a barrel in an extreme scenario.
For some analysts, the reason crude oil prices haven't risen further yet is because the oil market is tight. This refers to a trading strategy in which an investor hopes to make a profit if the market value of an asset falls.
“There is a very large short position, not just in oil [also] See it in stocks. In general, investors don't like this area. Why? “They're worried about a big oversupply of oil next year,” Jeff Currie, chief strategy officer for energy pathways at Carlyle, told CNBC's “Squawk Box Europe” on Wednesday.
“If we look at the situation today, it is completely different. Inventories are low, the curve is backwards, demand is mediocre, it's not great, but here you are [China’s] “We still have a stimulus package and there are still OPEC production cuts,” Currie said.
“In addition, we have brought into play a potential conflict in the Middle East that could cripple some energy facilities. Therefore, the near-term outlook is positive, which is why the curve is strong at the top, but is weighed to fall behind due to fears of this major oil glut,” he added.
The market is backwardated or in backwardation when the futures price of oil is below the spot price. The opposite structure is called contango.
“The market is so short”
Amrita Sen, founder and research director at Energy Aspects, echoed Currie's sentiments.
“The market is so short. We have never seen record levels of short positions before,” Sen told CNBC’s “Squawk Box Europe” on Thursday.
Many oil traders appear to have adopted a bearish stance because they believe China's economic recovery will not restore confidence in the world's second-largest economy, Sen said, adding that market participants also expect OPEC and its non-OPEC counterparts Allies plan to boost oil production later in the year.
“The market has just turned bearish, but if it does, we could be above $80 very quickly,” Sen said.
International scale Brent Crude oil futures due in December traded more than 1.5% higher at $78.81 a barrel on Friday, while U.S. West Texas Intermediate futures settled at $74.86, up 1, 6% for the session.
Basics “anything but encouraging”
The biggest oil move this week came on Thursday when prices rose more than 5% after US President Joe Biden commented on possible retaliation by Israel following the Iranian missile attack earlier in the week.
Asked by reporters whether the U.S. would support an Israeli attack on Iranian oil facilities, Biden said: “We are discussing it. I think that would be a little – anyway.” The president added: “Nothing will happen today.”
CNBC has reached out to the White House for further comment.
Tamas Varga, an analyst at oil broker PVM, told CNBC via email on Thursday that the oil market has priced in some risk premium given the geopolitical concerns.
“This is why oil prices are stable to high, stock prices are weak and the dollar is strong. However, these fears will be significantly reduced.” [the] “Unless oil supplies from the region or traffic through the Strait of Hormuz are significantly affected,” he added.
Located between Iran and Oman, the Strait of Hormuz is a narrow but strategically important waterway that connects crude oil producers in the Middle East with key markets around the world.
“In this scenario, underlying fundamentals become the driving force again, and those fundamentals are far from encouraging,” Varga said.
Israeli Prime Minister Benjamin Netanyahu vowed on Tuesday to respond with force to Iran's ballistic missile attack and insisted Tehran would “pay” for what he called a “big mistake.” His comments came shortly after Iran fired more than 180 ballistic missiles at Israel.
During a visit to Qatar on Thursday, Iranian President Masoud Pezeshkian said his country “does not seek war with Israel.” However, he warned against a strong response from Tehran to further Israeli actions.
An Islamic Revolutionary Guard Corps (IRGC) speedboat sails along the Persian Gulf near the Bushehr Nuclear Power Plant in the port city of Bushehr in Bushehr Province, southern Iran, during the IRGC naval parade commemorating the Persian Gulf National Day. on April 29, 2024.
Photo only | Photo only | Getty Images
Bjarne Schieldrop, chief commodities analyst at SEB, said oil prices were surprisingly stable given the high risks.
“I think it’s definitely a little bit about short-covering, but [the price rally] is surprisingly weak … given the scenarios that could play out in the Middle East,” he told CNBC's “Street Signs Europe” on Thursday.
Schieldrop said Brent crude prices traded broadly between $80 and $85 for about 18 months before falling below $70 in September. He described the recent rise in the oil contract as “very meager,” especially given the “potentially devastating scenarios in the Middle East.”
—CNBC's Spencer Kimball contributed to this report.
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