Oil Prices Surge 3% After Iran Fires Missiles at Israel Amid Middle East Tensions

Oil prices jumped approximately 3% on Tuesday following Iran’s launch of ballistic missiles at Israel in response to Israel's offensive against Tehran-backed Hezbollah forces in Lebanon.

Brent crude futures rose by $1.86, or 2.6%, to close at $73.56 per barrel, while U.S. West Texas Intermediate (WTI) crude increased $1.66, or 2.4%, to settle at $69.83 per barrel. Both benchmarks had earlier spiked by over 5% during the day.

The missile strikes prompted alarms throughout Israel, with explosions heard in Jerusalem and the Jordan River valley, leading Israelis to take shelter in bomb shelters.

Independent political risk strategist Clay Seigle commented in an email that Israel “will not hesitate to widen its military offensive to hit Iran directly. And Iran’s oil assets are very likely on the target list.” Seigle further warned that an Israeli assault on Iran's oil production or export infrastructure could cause significant disruption, potentially reducing output by more than a million barrels per day.

In the Red Sea, Iran-backed Houthi rebels in Yemen claimed responsibility for damaging at least one of two vessels near the port of Hodeidah. The Houthis have been attacking international shipping around Yemen since November as part of their solidarity with the Palestinians amid the conflict between Israel and Hamas in Gaza.

PVM analyst Tamas Varga highlighted the risks of a broader escalation: “In case of an escalation, Iran’s proxies, the Houthi rebels and Iraqi paramilitaries, might launch attacks on Middle East oil producers, namely Saudi Arabia.” Varga added, “There is now a genuine fear that oil supply will be impacted, and nervous and volatile trading is anticipated until the picture becomes clear.”

Before news of Iran's missile attack, oil prices had been trending near a two-week low, weighed down by concerns over increased global supply and sluggish demand growth. These factors had previously overshadowed fears of the Middle East conflict affecting oil exports.

A panel of ministers from the OPEC+ group is scheduled to meet on October 2 to review the market. No changes in policy are expected, but OPEC+ is set to increase output by 180,000 barrels per day (bpd) starting in December.

The possibility of Libya’s oil production recovering also added downward pressure to the market earlier in the day. Libya’s eastern-based parliament approved a new central bank governor on Monday, which could resolve the crisis that has reduced the country’s oil production.

Both Iran and Libya are OPEC members. In 2023, Iran, which is under U.S. sanctions, produced approximately 4.0 million bpd, while Libya produced around 1.3 million bpd, according to the U.S. Energy Information Administration (EIA).

Meanwhile, U.S. oil storage data from the American Petroleum Institute (API) is due later on Tuesday, followed by the EIA's weekly report on Wednesday. Analysts predict a 1.3 million barrel withdrawal from U.S. storage for the week ending September 27, which would mark the third consecutive withdrawal and compare with last year’s 2.2 million barrel draw for the same period. Over the past five years (2019-2023), the average change has been an increase of 400,000 barrels. 

By fLEXI tEAM