Oil Recovers From Selloff Amid Escalating Middle East Tensions

(Bloomberg) — Oil rebounded from last week’s selloff as tensions flared in the Middle East, with a vessel attacked in the Red Sea and Israeli tanks reaching the center of Rafah.

West Texas Intermediate rose 2.7% to settle above $79 a barrel. The gains followed a drop to three-month lows last week brought futures to oversold territory. The attack on a Greek-managed bulk carrier in the Red Sea and Israel’s advance into the southern Gaza city revived the geopolitical risk premium that had gone missing last week, when signs of ample supplies also weighed on crude.

“A confluence of factors suggest some upside sensitivity in oil — from fraught geopolitics to inventory drawdown to OPEC’s assumed preference to maintain curbs,” said Vishnu Varathan, Asia head of economics and strategy at Mizuho Bank Ltd. However, “the Gaza situation is only a warning not to be aggressively short, but not quite the unbridled bullish trigger.”

Adding risks to oil markets was the killing of an Egyptian soldier in a clash with Israeli troops at a Gaza border crossing as well as an Israeli strike that killed an estimated 45 Palestinians at a camp for displaced people. Despite the war’s continued escalations, crude flows from the Middle East — which account for a third of global supply — haven’t been hampered. Still, the Houthi attacks in the Red Sea have rerouted some flows.

Oil has risen this year on persistent geopolitical risks and OPEC ’s roughly 2 million barrels a day of output cuts, with the group expected to prolong its curbs into the second half of 2024 at a meeting on Sunday. Still, prices have dipped since early April amid signs of lackluster demand, causing Brent’s prompt spread to get closer to a bearish contango structure that indicates supply is plentiful relative to consumption.

Investors will also be looking for signs of US fuel demand after the Memorial Day holiday, which traditionally marks the start of the summer driving season.

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–With assistance from Jordan Fitzgerald.

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