Panoramic view of the Isfahan refinery in Iran on November 8, 2023. The refinery is one of the largest in Iran and is considered the first in the country in terms of diversity of petroleum products.
Fatmeh Bahrami | Anadolu | Getty Images
Oil prices have risen by more than $5 a barrel since the start of the week amid growing concerns about a potential Israeli attack on Iran's energy infrastructure.
The rally has crude oil futures expected to be up about 8% so far this week, surprising many market watchers as they appear to be weak given the risks they face.
Energy analysts have questioned whether oil markets are too complacent about the risk of a wider conflict in the Middle East, especially given that the consequences could disrupt oil flows in key exporting regions. Iran is a member of OPEC and a major player in the global oil market. It is estimated that as much as 4% of global supply could be at risk if Israel targets Iranian oil facilities.
Some analysts believe the reason crude prices haven't moved higher yet is because of a shortage in the oil market. This refers to a trading strategy in which investors hope to profit when the market value of an asset falls.
“There's a big short position, not just in oil, but in equities. Investors, in general, don't like the space. Why? They're worried about a severe oversupply of oil next year,” Jeff Currie, chief strategist at Carlyle Energy Pathways, said this week. Three said on CNBC's “Squawk Box Europe.”
“When we look at the situation today, it's a very different story. Inventories are low, there's a premium on the curve, demand is medium, it's not great, but now you have (China's) stimulus package on top of that and you still have OPEC production Cut back,” Curry said.
“On top of that, we've introduced a potential conflict in the Middle East that could destroy some energy facilities, so the near-term outlook is positive, which is why the front end of the curve is strong, but it's being weighed against the back end due to concerns about an oil oversupply. Prices fell at the end of the year,” he added.
When oil futures prices are lower than spot prices, backwardation occurs in the market. The opposite structure is called contango.
'The market is so short'
Amrita Sen, founder and research director of Energy Aspects, agrees with Currie.
“The market is so bearish. We've never seen levels of bearishness like this before,” Mori told CNBC's “Squawk Box Europe” on Thursday.
Many oil traders appear to be taking a bearish stance, arguing that China's stimulus measures will not restore confidence in the world's second-largest economy, Sen said, adding that market participants also tend to expect OPEC and non-OPEC allies to Boost oil prices later this year production.
“The market has just fallen into this bearish mood, but that’s why if this continues, we could be above $80 soon,” Sen said.
international benchmark Brent Crude oil futures expiring in December fell 0.1% to $77.54 a barrel on Friday, while U.S. West Texas Intermediate crude futures fell 0.1% to $73.65 a barrel.
Fundamentals 'not encouraging at all'
The biggest move in oil prices this week occurred on Thursday, when prices Earlier this week, U.S. President Joe Biden commented on possible retaliatory actions by Israel following an Iranian ballistic missile attack, sending the stock price up more than 5%.
Asked by reporters whether the United States would support an Israeli attack on Iranian oil facilities, Biden said: “We're talking about it. Regardless, I think it will be a little bit.” The president added, “Nothing is going to happen today. ”
CNBC has reached out to the White House for further comment.
Tamas Varga, an analyst at oil broker PVM, told CNBC via email on Thursday that there is a certain risk premium in oil market pricing due to geopolitical concerns.
“That's why oil prices are steadily higher, stocks are weaker, and the U.S. dollar is stronger. However, unless oil supplies from the region or traffic through the Strait of Hormuz unblocks, these concerns will ease significantly in the coming days. There will be significant impact on Impact,” he added.
The Strait of Hormuz, a narrow but strategically important waterway between Iran and Oman, connects Middle Eastern crude producers to major markets around the world.
“In this case, fundamentals are going to be the driver again, and those fundamentals are not encouraging at all,” Varga said.
Israeli Prime Minister Benjamin Netanyahu on Tuesday pledged a military response to Iran's ballistic missile attacks, insisting Tehran would pay for what he called a “big mistake.” His remarks came shortly after Iran fired more than 180 ballistic missiles at Israel.
Iranian President Masoud Pezeshkian said during a visit to Qatar on Thursday that Iran had “no intention of going to war with Israel.” However, he warned that Tehran would respond forcefully to any further Israeli actions.
An Islamic Revolutionary Guards speedboat sails along the Persian Gulf during the Iranian Revolutionary Guards' maritime parade to commemorate the Persian Gulf National Day near the Bushir Nuclear Power Plant in the port city of Bushir in southern Iran's Bushir province on April 29, 2024.
Noor Photos | Noor Photos | Getty Images
Bjarne Schieldrop, chief commodities analyst at Swedish bank SEB, said oil prices were surprisingly stable given the higher risks.
“I think it's definitely related to short covering, but (price increases) are surprisingly weak given what may be going on in the Middle East,” he told CNBC's “European Street Signs” on Thursday.
Schieldrop said Brent crude prices had fluctuated between $80 and $85 for about 18 months before falling below $70 in September. He described recent gains in oil contracts as “very weak,” especially given the “potentially devastating situation in the Middle East.”
—CNBC’s Spencer Kimball contributed to this report.