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Crude oil prices spiked after Iran launched approximately 200 ballistic missiles at Israel on Tuesday, marking a significant escalation in the Middle East conflict. The attack was in retaliation for the killing of a Hezbollah leader and an Iranian commander, followed by Israel’s deployment of ground forces into southern Lebanon.

Brent futures on the ICE rose 2.9% to $73.56 per barrel, while WTI futures on the Nymex surged 3.5% to $70.92 per barrel on Tuesday.

Both benchmark oil prices continued to climb by over 1% during the Asian session on Wednesday, reaching $74.56 and $70.94 per barrel, respectively, as of 4:45 am CEST.

For the time being, the impact on the oil market appears limited, as most missiles were intercepted by Israeli defences, with only one reported fatality – a Palestinian civilian in the West Bank.

Oil prices may face further upside pressure

The primary concern for oil markets is the potential for retaliatory strikes on Iranian oil facilities by Israel, which could push crude prices significantly higher.

Iran is among the top 10 oil producers globally, with production reaching over 3.3 million barrels per day in August – the highest in five years, according to the Organisation of the Petroleum Exporting Countries (OPEC).

Iran exports half of its production, representing approximately 2% of global supply.

Additionally, the escalating military conflict between Iran and Israel could lead to the reinstatement of US sanctions on Iranian oil exports, further driving up oil prices.

Josh Gilbert, Market Analyst at eToro, said: “This undoubtedly provides short-term support for oil, especially if we see these geopolitical tensions escalate further.”

Oil prices had been in a downtrend over the past three months due to a weakened demand outlook, driven by softer global economic data, particularly from the US and China.

Meanwhile, record-high oil output in the US and the global shift towards green energy have contributed to the price slump. Despite these macroeconomic headwinds, intensifying geopolitical tensions often act as a bullish factor for the oil market.

China’s recent policy measures may also improve the demand outlook for the world’s largest oil importer.

Last week, the People’s Bank of China (PBOC) announced a 0.5% cut to the Reserve Requirement Ratio (RRR), accompanied by key leading rate cuts. China has also implemented several easing policies to support its housing sector and stock markets. 

Gilbert added: “China’s stimulus package is also a significant factor. If there’s a view that the world’s second-largest economy is set to ramp up demand at a time when supply might be constrained, it provides a tailwind for crude prices.”

OPEC+ to Hold Production Meeting

Markets are also watching the upcoming OPEC+ online meeting at 12 noon GMT.

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The group is not expected to make any changes to its current plan for an output cut of 5.86 million barrels per day, although sources suggest it may unwind the cuts from December, according to the Financial Times.

The organisation had previously agreed to increase its joint output by 180,000 barrels per day from December as part of its plan to raise supply in 2025.

Amid surging US production and falling oil prices, OPEC+ is under pressure from declining market share and profitability.

Meanwhile, the voluntary production cuts have not been fully adhered to by member countries, with nations such as Iran and Kazakhstan failing to meet their commitments.

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These two countries oversupplied and have pledged to compensate with cuts of 123,000 barrels per day in September and October. Until these compensatory cuts are fulfilled, OPEC+ is unlikely to raise output.

However, the situation also underscores the crucial role Iran plays in influencing oil market trends.

Any further escalation in geopolitical tensions could push oil prices higher once again, complicating the global inflation outlook.

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