Oil sheds 5% over possible ceasefire reports in Lebanon after Israel-Iran war stokes supply fears, Brent drops to $77

International crude oil prices reversed Monday's gains and crashed five per cent on Tuesday, October 8, snapping a five-day rally, as fears of supply disruptions from the conflict between Israel and Iran eased after Iranian-backed Hezbollah signalled support for a ceasefire proposal put forth by Lebanon's government. Local news reports suggested a possible ceasefire between Hezbollah and Israel.

Brent crude futures were last down $3.70, or 4.57 per cent, to $77.23 a barrel. US West Texas Intermediate futures were down $3.57, or 4.63 per cent, at $73.57 a barrel. Both were down more than $4 a barrel at their session lows. On Monday, Brent rose above $80 per barrel for the first time since August after more than a three per cent daily gain. 

Also Read: Oil extends steepest weekly gain in one year over Israel-Iran war; Brent reclaims $80, WTI at five-week high

That followed the largest weekly gain in over a year, roughly eight per cent, in the week to Friday, October 4, on the rising concerns of a spreading war in the Middle East. A gauge of implied volatility for Brent remains near the highest in a year. Back home, crude oil futures last traded 3.78 per cent lower at ₹6,230 per barrel on the multi-commodity exchange (MCX).

Brent snaps five-day rally: What's dragging crude oil prices?

-The drop, which began slowly on fears of reduced Chinese demand, snowballed after Hezbollah signalled support for a ceasefire and Israel expanded its ground war in Lebanon instead of attacking Iran's oil infrastructure. China’s top economic planner ended a highly anticipated briefing on Tuesday without new stimulus measures, sparking a risk-off mood across markets.

-China’s National Development and Reform Commission said it’s confident it will reach its economic targets this year, but the lack of new spending disappointed investors. Most commodity prices tamped own over the quick disappointment for traders expecting to see new fiscal spending.

Also Read: Oil soars 10% in five days, logs biggest weekly gain in one year over Israel-Iran war; Brent sits at $78/bbl

-Analysts said Hezbollah is open to a ceasefire, which is the headline that people jump on. This could cause a lot of volatility in the oil market. Hezbollah left the door open to a negotiated ceasefire after Israeli forces raised the stakes in the conflict with its Iran-backed enemy by making new incursions in the south of Lebanon.

-Israeli defence minister Yoav Gallant said it appeared the replacement for slain Hezbollah leader Sayyed Hassan Nasrallah had also been eliminated. Late on Tuesday, Israel's military warned people away from specific buildings in the southern suburbs of Beirut. The oil price rally began after Iran launched a missile barrage at Israel on October 1. Israel has sworn to retaliate and said it was weighing its options.

-Some analysts said an attack on Iranian oil infrastructure was unlikely and warned oil prices could face considerable downward pressure if Israel focuses on any other target. Although it would be irresponsible to claim that the dust has settled on Iran’s direct and ominous involvement in the conflict, for now, the threats of Israeli assaults on Iranian oil infrastructure have not materialized.

Also Read: OPEC+ to pause planned October oil output hike of 180,000 bpd for two months

-Oil demand from China, the world’s top crude importer, has been a major cause for concern among investors, and prices slumped in the third quarter largely due to those worries. With crude rallying more than $7 per barrel since Iran first launched missiles at Israel, some investors are also likely booking profits as markets await new developments.

-In the US, Hurricane Milton intensified into a Category 5 storm on its way to Florida after forcing at least one oil and gas platform in the Gulf of Mexico to shut on Monday. Traders will look for the latest US crude oil inventory data. According to a preliminary poll by news agency Reuters, analysts expect stocks to rise by 1.9 million barrels in the week ending October 4.

-The Middle East accounts for a third of global crude supply, and US President Joe Biden has sought to discourage Israel from attacking Tehran’s oil fields. According to Bloomberg News, Israel’s defence minister is set to travel to Washington as the country weighs how to respond to Iran’s attack.

Also Read: Hang Seng rallies 33% in 21 days as Nippon India ETF trades at 5% premium: Will China stimulus boost SIP returns?

Where are oil prices headed?

The crude oil prices surged following concerns over a potential retaliatory strike by Israel on Iran’s oil facilities. However, the steady performance of the dollar index and US 10-year bond yields, both hovering near two-month highs, has raised concerns about the US Federal Reserve pausing its interest rate cut cycle, which could limit further gains in crude oil prices. 

“We expect crude oil prices to remain volatile in today’s session. Support levels for crude oil are at $75.30–$74.50, with resistance at $76.30–$76.90. In INR terms, crude oil has support at ₹6,410– ₹6,340 and resistance at ₹6,550– ₹6,630,” said Rahul Kalantri, VP Commodities, Mehta Equities Ltd.
 

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