Crude oil prices rose to as high as US$87.9 a barrel over the weekend amid expectations of a protracted conflict in the Middle East following terrorist group Hamas’ attack on Israel.
Warren Patterson, head of commodities strategy at ING Economics, described the market shift as a “war risk premium”.
“Up until now, the move in the market is purely reflecting an increased risk premium, rather than any change in fundamentals,” he said.
“Israel is a very marginal oil producer, and so recent developments will have little direct impact on oil supply. However, given the rising tension in the region and the risk that the conflict could spread, market participants will remain nervous until there is a clear de-escalation.”
According to Mr Patterson, the breakout in conflict could undermine the longer-term stability of the commodity if regional tensions spill over.
“While oil fundamentals have not changed since these attacks, it does not mean they won’t. There are reports that Iran helped Hamas plan the attacks and gave them the ‘green light’,” he continued.
“If this is proven to be true, we could see the US, an ally of Israel, taking a tougher stance against Iran, which could ultimately lead to a reduction in oil supply.”
Any ramifications on Iran, one of the world’s largest oil suppliers, could undermine current supply levels of approximately 3 million barrels per day.
“The implication of losing this supply would be that the global oil balance would be tighter throughout 2024,” Mr Patterson added.
“…If this loss materialises, the surplus we currently forecast in 1Q24 would largely disappear, leaving the market roughly in balance early next year.
“For the remainder of 2024, we would see deeper deficits, particularly over 2H24. Under this scenario, there would be some upside risk to our current Brent forecast of US$90/bbl for next year.”
Moreover, upward pressure on oil prices could derail global efforts in the fight against inflation, with higher fuel prices threatening to inflate goods and services costs.
“Markets will be watching the oil price today for early signals on any potential market impact via safe-haven currency flows, risk pricing, or inflation fears,” Mr Patterson added.
Higher fuel prices partly contributed to an inflation pick-up in Australia, according to the last monthly consumer price index (CPI).
Automotive fuel prices jumped by 13.9 per cent in the 12 months to August, the largest annual movement since November last year. In monthly terms, the ABS said that fuel prices rose by 9.1 per cent in August following a 0.2 per cent fall in July.
The Reserve Bank of Australia (RBA) flagged a sharp increase in fuel prices in its September meeting minutes.
According to the central bank, the argument to raise the cash rate by a further 25 basis points in September hinged on the recent increase in petrol prices, which is a key input for households’ inflation expectations.
“Fuel prices had increased sharply in August. By itself, this would boost headline inflation in the September quarter, relative to expectations in early August,” the RBA said, but decided at the time that inflation was still expected to continue to moderate.
Fuel prices have been on an upward trajectory for the past few years, initially exacerbated by the conflict between Russia and Ukraine.