Markets respond to Iran’s attack on Israel

Stocks opened lower and remained there until the close, as investors were concerned about the potential disruption caused by a major port strike and rising Middle East tensions. The latest round of economic data also weighed on sentiment.

In fact, US stocks closed sharply lower on Tuesday, October 1st, after Iran launched over 100 ballistic missiles at Israel, causing oil prices for West Texas Intermediate and Brent to reach their highest levels in nearly a year. Prime Minister Benjamin Netanyahu has promised to retaliate for an attack, but Tehran has warned that any response would result in “vast destruction,” raising fears of a wider war. Israel also warned that it could attack Iranian oil facilities, potentially sparking a regional war with Iran and increasing the risk of crude supply disruptions.

The tech-heavy Nasdaq Composite led the losses, falling around 1.5%. The Dow Jones Industrial Average fell 0.4%, while the S&P 500 closed 0.9% lower after reaching new record highs in the previous month and quarter.

Oil prices surge amid Middle East market tensions and Fed remarks

U.S. crude oil prices rose more than 2% on Tuesday, falling from session highs as traders weighed whether Iran’s missile attack on Israel would lead to further escalation in the Middle East.

The US crude oil benchmark, West Texas Intermediate (WTI), was trading around $70.65 on Wednesday October 2nd. WTI prices edged higher after Iran launched missiles in Israel in a direct attack, raising fears of regional supply disruptions.

On the other hand, less dovish remarks from Federal Reserve (Fed) Chair Jerome Powell, who pushed back against calls for another significant rate cut in November, could weigh on the WTI price. Fed Chair Jerome Powell stated that more rate cuts are likely as the economy remains stable, but he cautioned against making sudden changes.

Brent crude for December delivery also rose 4.2% to $74.71 per barrel. This rally reflects market participants’ growing concerns about the future of oil supplies from a region with some of the world’s largest reserves.

Traders will be looking for new motivation from speeches by US Federal Reserve (Fed) officials. Any hawkish remarks by Fed officials could drive the WTI price lower. It is worth noting that lower interest rates reduce the cost of borrowing, which boosts overall oil demand.

Analysts warn: Oil supply risks

“There has been a lot of complacency about this war,” said Helima Croft, head of global commodity strategy at RBC Capital Markets, on CNBC’s “The Exchange.” Traders have largely dismissed the threat of oil supply disruptions caused by simmering Middle East tensions, she said.

Croft believes that Israel may target Iran’s nuclear facilities or oil infrastructure in response to the attack. Iran’s production has reached a five-year high of more than 3 million barrels per day, she said.

This year, oil market and geopolitical analysts have repeatedly warned that an Israeli incursion into Lebanon could set off a regional war with Iran, raising the risk of crude supply disruptions.

According to Bob McNally, president of Rapidan Energy, the impact on the oil market will be determined by the “scope and damage” of an Iranian attack, which will then drive Israel’s response.

Gold rises as Middle East market tensions shift investor sentiment

Western investors are excited about the prospect of ‘panic cuts without the panic’, but Shanghai traders are interested in precious metals. This morning, TDS commodity analyst Daniel Ghali reports that a direct military confrontation between Israel and Iran is driving safe-haven inflows into gold.

The possibility of monetary inflation has historically helped Gold.  This prospect of monetary inflation has historically helped gold prices, but note that in real terms, prices are already at levels not seen since the 1980s, macro fund positioning is already extreme, central bank buying activity has slowed, and a resurgence in Asian confidence could sap a major driver of gold demand. In the short term, the prospect of a direct conflict between Iran and Israel is driving even more capital into gold.

Selling activity in gold has been somewhat limited, but the top traders still liquidated nearly 5t of the notional gold over the last week. This is in contrast to Western investor sentiment.

Potential impact of regional conflict on Israel’s gas infrastructure

Any impact on Israel’s gas infrastructure from a larger conflict with Hezbollah would have both regional and domestic consequences.

Israel is a significant gas producer and regional exporter, with output expected to reach a record high of 24.7 Bcm in 2023, according to Israeli energy ministry data published in May.

Production increased further in the first half of 2024, rising 7% year on year to 13.1 Bcm, indicating that production will set a new record in 2024.

As a major regional gas exporter and with Egypt relying heavily on its supplies to meet domestic demand, without Israeli gas, Egypt would have to import additional LNG cargoes on top of those it has already agreed to take, further tightening LNG markets.

Iran, a major crude exporter and OPEC member, sends the majority of its oil to China despite US sanctions. In August, Iran’s crude production reached 3.18 million barrels per day (b/d), up 600,000 b/d from two years ago. The Persian Gulf, which includes Iran, accounts for roughly 20% of global oil exports and Qatari LNG.

In Yemen, Iranian-backed Houthi rebels have increased their attacks on Red Sea shipping, targeting over 70 vessels since early 2024. The ongoing conflict between Israel and Hamas has increased jet fuel demand in the Middle East, with projections indicating an average of 577,000 b/d for jet fuel/kerosene in Q4, a 7.9% increase year on year. Furthermore, air cargo demand increased by 20% in Africa and 6.4% in the Middle East in April, according to the International Air Transport Association.

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