Oil surges to $75 a barrel amid Middle East escalation fears

Oil prices climbed more than 2% on Wednesday on rising concerns that Middle East tensions could escalate, potentially disrupting crude output from the region, following Iran's biggest ever military blow against Israel. Classic safe havens like gold, government bonds and the Swiss franc surged on Tuesday and were holding most of those gains on Wednesday, while oil traded at $75 a barrel.

A panel of ministers from OPEC+, which includes Russia, meets later on Wednesday to review the market, with no policy change expected. The group is set to raise output from December by 180,000 bpd monthly.

"Any suggestion that production hikes will proceed could offset concerns of supply disruptions in the Middle East," ANZ analysts said.

However, Saudi Arabia's oil minister said that oil prices could drop to as low as $50 per barrel if OPEC+ members do not stick to agreed-upon production limits, the Wall Street Journal reported on Wednesday citing delegates from the oil producers group.

Treading carefully

With no clarity yet on how the Middle East conflict might evolve, investors are treading tentatively.

Their key question is whether Iran's strike marks an escalation, or is more of a one-off backlash.

Mohit Kumar, a strategist at US investment bank Jefferies, called the market reaction so far "guarded" as investors await Israel's response.

"Geopolitics is impossible to trade and hence keeping a low risk profile would be a prudent strategy," Kumar said.

Iran said early on Wednesday that its missile attack on Israel was over barring further provocation, while Israel and the US promised to strike back against Tehran as fears of a wider war intensified.

"This could include damaging or obliterating Iran's oil facilities," said Tamas Varga of oil broker PVM.

Tehran said any Israeli response to the attack, which Israel said involved more than 180 ballistic missiles, would be met with "vast destruction".

In another escalation of the conflict, the Israeli military on Wednesday sent regular infantry and armoured units to join ground operations in southern Lebanon against Iran-backed Hizbollah.

The United Nations Security Council scheduled a meeting about the Middle East for Wednesday, and the European Union called for an immediate ceasefire.

Iran's oil output rose to a six-year high of 3.7 million barrels per day (bpd) in August, ANZ analysts said.

"A major escalation by Iran risks bringing the US into the war," Capital Economics said in a note. "Iran accounts for about 4% of global oil output, but an important consideration will be whether Saudi Arabia increases production if Iranian supplies were disrupted."

Past bouts of heightened geopolitical tension, such as Russia’s invasion of Ukraine in 2022, resulted in sharp but short-lived market moves during which investors fled risky assets and piled in to havens such as gold and the dollar.

Global stocks traded cautiously higher on Wednesday, while government bonds gave up some of Tuesday's gains.

This time, investors' decisions may rest on Israel's response and whether the conflict with Iran escalates.

"The market ... is highly sensitive to any scenario worse than this," said Hasnain Malik, head of emerging and frontier markets equity strategy at Tellimer.

Gold is already up nearly 30% this year, thanks in large part to a decline in the dollar in response to a slowing US economy and the Federal Reserve's decision to deliver steep interest-rate cuts to ward off more weakness.

However, "if the war escalates, that of course is not good for markets," said Allan Small, senior investment adviser with Allan Small Financial Group with iA Private Wealth in Toronto.

War fears may trigger sharp rise in crude prices

One specific concern for investors is oil prices, which jumped on Tuesday. Investors worry that the fears of supply disruptions from the Gulf will push crude prices sharply higher, as happened in prior periods of intense strain or conflict.

"The deeper the conflict intensifies, oil could indeed surge higher as risk rises that the military response veers into the oil producing area around Iran," Quincy Krosby, chief global strategist for LPL Financial, said in a note.

Beyond tensions in the Middle East, there are several potential catalysts that could keep investors on edge, including the upcoming US election in November and a key jobs report this week that will help shape the Fed's policy direction.

For now, market participants are left guessing whether the latest bout of fear will prove fleeting.

"Markets ... are likely to display an incredibly high sensitivity to incoming geopolitical news flow in the coming hours," said Michael Brown, senior research strategist at Pepperstone.

Agencies