On Tuesday, oil prices fell to their lowest level in more than three months, erasing all gains achieved since Hamas attacked Israel on October 7, with hedge funds wagering that the crisis will not draw in oil-rich neighboring nations.
Brent oil, the worldwide standard, fell 4.2 percent to $81.61 per barrel, returning to levels last seen in late July and thus ending the surge that began in early October. The US benchmark West Texas Intermediate crude lost 4.3% to $77.37 a barrel.
The Hamas strikes and Israel’s subsequent declaration of war stoked worries of a larger conflict threatening the Middle East’s oil and gas supply, sending prices up more than 10% to about $93 per barrel by the middle of last month.
Traders, on the other hand, feel there is no imminent threat of the war expanding and bringing in nations such as Iran.
“While the death toll in Gaza from Israeli air strikes continues to rise to unimaginable levels,” said Ole Hansen, director of commodities strategy at Saxo Bank, “the prospect of the conflict spreading to the oil-rich part of the Middle East is increasingly being put at near-zero.”
Hedge funds are also liquidating long positions taken after the war began. According to statistics from the US Commodity Futures Trading Commission, they sold the equivalent of more over 70 million barrels of crude oil across Brent and WTI, the two market benchmarks, in the week ending October 31.
Traders were now “discounting possible escalation” in the Middle East and instead focusing on mediocre economic data from the US, Europe, and China, according to Helima Croft, head of commodities strategy at RBC Capital Markets.
“Many of them got burned” last year after overestimating the magnitude of the interruption to oil supplies caused by Russia’s invasion of Ukraine, according to Croft. “So, they want to see that risk really manifest before pricing it in,there are still major risks, in my opinion, but market participants have opted to go on.”
Oil prices had already dropped considerably on Friday after Hassan Nasrallah, the head of the Lebanese terrorist organization Hizbollah, avoided advocating for an escalation of the conflict in a speech. Hansen stated that his remarks “took the sting out of the war premium.”
Following Moscow’s full-scale invasion of Ukraine last year, oil prices have been under pressure for most of 2023, but have seen some support in recent months as Saudi Arabia and Russia lead Opec+ in limiting output and exports.
Brent oil and WTI prices are still higher than they were before Saudi Arabia launched its first voluntary decrease in production in July.
Saudi Aramco, the kingdom’s state-owned firm in charge of about a tenth of the world’s oil supply, announced greater third-quarter earnings on Tuesday compared to the previous three-month period, as higher prices outweighed decreased sales volumes.
According to Bjarne Schieldrop, chief commodities analyst at SEB, markets are looking for more action from Saudi Arabia and Russia if oil prices fall below $80 per barrel – the threshold at which both governments’ budgets begin to strain.
“If it goes below $80 per barrel, I think Saudi Arabia and Russia will intervene to create confidence about the price level and say ‘we’re ready to defend the price’,” he added.
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