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Crude oil prices were set to end the week with substantial gains pushed higher by the latest events in the Middle East.
Both Brent crude and West Texas Intermediate were about 8% higher on Friday morning in Asian trade than they were at the start of the week. The jump follows Iran’s missile barrage on Israel, the latter’s vow to retaliate, and comments by U.S. President Biden that his administration was discussing strikes on Iranian oil facilities with the Israelis.
The Iranian government, in turn, has said that “Any type of military attack, terrorist act or crossing our red lines will be met with a decisive response by our armed forces.”
The latest Middle Eastern developments come amid historically high bearish bets on crude oil, motivated by a somewhat excessive focus on demand and more specifically demand from China. Short position holders are in for some excitement right now, even if the exchange of threats between the U.S. and Israel, on the one hand, and Iran on the other, goes no further.
“This is going to really test the mettle of the market because up until now the risk to supply has been downplayed, as there has been no disruption, so this could be a game changer,” Price Futures Group analyst Phil Flynn told Reuters.
“It’s hard to overstate how complacent the oil markets have become,” Rapidan Energy Group president Bob McNally told CNN. “This [the Middle East] is by far the world’s most important production and export region. It’s nothing less than the heart and circulation system of the global economy.”
Be that as it may, the rise of the U.S. to the position of biggest oil producer has served to mitigate the severity of any supply disruption, at least to some extent. “Pre-shale revolution, this type of situation would have sent prices well above $100,” RBC Capital Markets’ Helima Croft told CNN.
Such prices might yet materialize in case of a disruption, though. “The potential for supply disruptions – particularly, but not exclusively from Iran – increases as the fighting intensifies,” the chief economist of Rystad Energy, Claudio Galimberti told Reuters.
