Oil jumps over $3 a barrel as Middle East conflict stokes supply worry

By Georgina McCartney

HOUSTON (Reuters) -Oil prices surged on Thursday as concerns mounted that a widening regional conflict in the Middle East could disrupt global crude flows.

Brent crude futures settled up $3.72, or 5.03%, at $77.62 a barrel. U.S. West Texas Intermediate (WTI) crude futures settled up $3.61, or 5.15%, to $73.71.

Brent futures reached an intraday high of $77.89 per barrel, while WTI futures peaked at $73.97 per barrel, both hitting one-month highs.

Market fears are rising over the possibility that Israel might target Iranian oil infrastructure, which could provoke retaliation.

Asked on Thursday if he would support Israel striking Iran's oil facilities, U.S. President Joe Biden told reporters "we're discussing that." He added: "There is nothing going to happen today."

The Pentagon said it was in discussions with Israeli officials about their possible response to Iran's missile attack but declined to offer details.

"We are certainly talking to them about their response, but what their response might be, I'm just not going to speculate further on. But we do continue to engage with them," said Pentagon spokesperson Sabrina Singh.

Iran is a member of the Organization of the Petroleum Exporting Countries with production of around 3.2 million barrels per day or 3% of global output.

"This is going to really test the mettle of the market because up until now the risk to supply has been downplayed, as there has been no disruption, so this could be a game changer," said Phil Flynn, senior analyst for Price Futures Group.

There are concerns that such escalation could prompt Iran to block the Strait of Hormuz or attack Saudi infrastructure, as it did in 2019, said Panmure Gordon analyst Ashley Kelty.

The strait is a key logistical chokepoint through which a fifth of daily oil supply passes.

"Our estimates for Q4 2024 were $75/bbl prior to the recent headline, but if these attacks come to fruition prices could average levels closer to $78-$80/bbl," StoneX analyst Alex Hodes said in a note Thursday.

Ministers from Gulf Arab states and Iran attended a meeting of Asian nations hosted by Qatar to discuss de-escalating hostilities between Israel and Iran, three sources told Reuters on Thursday.

The Gulf Arab states sought to reassure Iran of their neutrality in the conflict on concerns that further violence could threaten Gulf oil facilities, two of the sources said.

CONFLICT DEEPENS

Israel's military told residents of more than 20 towns in south Lebanon to evacuate their homes immediately on Thursday as it pressed on with its cross-border incursion and struck Iran-backed Hezbollah targets in a suburb of Beirut.

Israeli Prime Minister Benjamin Netanyahu said Iran would pay for its missile attack against Israel on Tuesday while Tehran said that any retaliation would be met with "vast destruction," stoking fears of a wider war.

"The intensifying conflict in the Middle East is generating significant supply concern in the global crude market," Rystad Energy’s chief economist, Claudio Galimberti said in a note on Thursday.

"The potential for supply disruptions – particularly, but not exclusively from Iran – increases as the fighting intensifies," he added.

The National Oil Corp (NOC) lifted the force majeure at all Libyan oilfields and terminals, the state oil company said in a statement on its Facebook page, potentially ending a crisis that has heavily reduced oil output.

U.S. crude inventories rose by 3.9 million barrels to 417 million barrels in the week ended Sept. 27, the Energy Information Administration said on Wednesday, compared with Reuters poll expectations of a 1.3 million barrel decline.

"Swelling U.S. inventories added evidence that the market is well supplied and can withstand any disruptions," ANZ analysts said in a note.

Fears have been tempered by OPEC oil spare output capacity and the fact that global crude supplies have yet to be disrupted by unrest in the region.

OPEC has enough spare capacity to compensate for a possible full loss of Iranian supply.

(Reporting by Georgina McCartney in Houston, Arunima Kumar in Bengaluru, Gabrielle Ng in Singapore; editing by David Goodman, Kirsten Donovan and David Gregorio)