Brent crude surges above $80 as conflict and storm spark supply fears

Oil prices surged above $80 on Monday as fears grow of an escalating conflict in the Middle East and possible supply disruptions in the US Gulf of Mexico from a major hurricane.

Brent crude, the global oil benchmark, rose 3.7 per cent to settle at $80.93 a barrel, the highest since August, as the Middle East braced for the possibility of Israeli strikes on Iranian oil facilities in retaliation for rocket attacks last week.

Oil prices are now up almost 20 per cent since hitting a year-to-date low in early September.

Phil Flynn of the Price Futures Group said: “They are moving on the risk that Israel may attack Iranian oilfields and the risk that Hurricane Milton will become a massive storm that will hit Florida and shut in Gulf of Mexico oil and gas production.”

He said the loss of Iranian oil would leave the market in a supply deficit at a time when the US Strategic Petroleum Reserve had been depleted. The world’s spare capacity would be in the hands of Opec and Russia, said Flynn.

The price of Brent crude, which had dropped sharply since early April, had already gained more than 8 per cent last week, the biggest weekly gain since January 2023, driven by Iran’s missile attack against Israel last week.

Traders are concerned about a potential strike against energy infrastructure in the region or disruption in the Strait of Hormuz.

Investors are also watching for any potential supply disruptions caused by Hurricane Milton, a category 5 storm moving across the Gulf of Mexico towards the west coast of Florida. Chevron said it had evacuated personnel and shut production at one of its oil platforms in the region on Monday.

US benchmark West Texas Intermediate crude also increased almost 4 per cent, topping $77 a barrel.

There are signs that hedge funds, many of which had been betting on oil extending this year’s falls, are beginning to adjust their positioning. Funds trimmed their large short bets against Brent and increased their long positions in the week to October 1, in the early stages of last week’s rally, according to ICE data.

However, computer-driven funds that tried to latch on to market trends were likely to have still been betting against oil as of Thursday, according to a model portfolio run by Société Générale.

Israel on Monday marked the first anniversary of Hamas’s deadly October 7 attack. Ceremonies held in southern Israel were disrupted by the group firing rockets into the territory from Gaza. Rockets also set off sirens in Tel Aviv.

The events come during a fresh offensive by Israeli forces in northern Gaza and follow an incursion by ground troops into Lebanon, where Israel is trading fire with Iran’s proxy Hizbollah.

US President Joe Biden on Thursday said Israel had discussed striking Iran’s oil facilities in retaliation for an Iranian missile barrage fired at Israel last week. He later suggested Israel should consider other options.

“If I were in their shoes, I’d be thinking about other alternatives than striking oilfields,” Biden said on Friday.

The Islamic republic exports 1.7mn barrels of oil a day, mainly from a terminal on Kharg Island, about 25km off the country’s southern coast.

Daan Struyven, an analyst at Goldman Sachs, told clients that a six-month disruption, hitting about 1mn b/d, would push Brent up to $85 in the middle of next year if Opec offsets the shortfall. Prices could climb to the mid-$90s without an offset, he forecasted.

“Investors are focused on the risk that Israel and Iran may enter a cycle of retaliatory attacks that may escalate into a broader conflict,” Struyven said.

Additional reporting by Laurence Fletcher