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Oil fell to a two-month low on Tuesday, reversing all gains made since Hamas attacked Israel on October 7, with hedge funds betting that the conflict will not draw in oil-rich neighbouring countries.
Brent crude, the international benchmark, fell 3 per cent to $82.65 per barrel, dropping back to levels last seen in late August and wiping out the rally that began in early October. The US benchmark West Texas Intermediate fell 3.1 per cent to $78.32 a barrel.
Hamas’s attacks and Israel’s subsequent declaration of war sparked fears of a wider conflict that could hit the Middle East’s oil and gas supplies, pushing prices up more than 10 per cent to almost $93 a barrel by the middle of last month.
But those fears have largely subsided among traders, who believe there is little imminent danger of the conflict escalating and drawing in countries such as Iran.
“While the death toll in Gaza from Israeli air strikes continues to rise to unimaginable levels, the prospect for the conflict spreading to the oil-rich part of the Middle East is increasingly being put at near-zero,” said Ole Hansen, head of commodity strategy at Saxo Bank.
Hedge funds are also exiting long positions taken up following the outbreak of the war. In the week to October 31, they sold off the equivalent of more than 70mn barrels of crude oil across Brent and WTI, the two market benchmarks, according to data from the US Commodity Futures Trading Commission.
Traders were now “discounting possible escalation” in the Middle East and instead turning their attention to lacklustre economic data coming out of the US, Europe and China, said Helima Croft, head of commodity strategy at RBC Capital Markets.
“Many of them got burnt” last year after overestimating the scale of disruption to oil supplies following Russia’s invasion of Ukraine, said Croft. “[So] they want to see that risk really materialise before they start pricing that in . . . I think there are still significant risks, but market participants have decided to move on.”
Oil prices had already fallen sharply on Friday after a speech by Hassan Nasrallah, leader of the Lebanese militant group Hizbollah, stopped short of calling for an escalation of the conflict. His speech “took the sting out of the war premium”, Hansen said.
After rallying above $100 a barrel last year following Moscow’s full-scale invasion of Ukraine, oil prices have been under pressure for much of 2023, but have had some support in recent months after Saudi Arabia and Russia led Opec+ in cutting output and exports.
Prices of Brent crude and WTI remain about 15 per cent higher than levels recorded before Saudi Arabia made its first voluntary cut to production in July.
Saudi Aramco, the kingdom’s state-run company responsible for nearly a tenth of the world’s oil supplies, reported stronger third-quarter profits on Tuesday compared with the previous three-month period, as higher prices more than offset lower sales volumes.
Bjarne Schieldrop, chief commodities analyst at SEB, said markets were watching for further action from Saudi Arabia and Russia should prices fall below $80 a barrel — around the level where both government’s budgets start to strain.
“If it goes below $80 per barrel, I think Saudi Arabia and Russia will intervene to create confidence about the price level and say ‘we’re ready to defend the price’,” he said.