WTI Falls to Pre-War Levels as Geopolitical Risk Recedes

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange settled Monday's session with losses between 2.5% and 3.5% as investors pared back bets that Israel's ground incursion into the northern Gaza Strip would spill into a larger regional conflict, minimizing the risk of supply disruption from the Middle East that accounts for one-third of global oil production.

Oil complex kicked off the new trading week with a sharp selloff, pressuring front-month West Texas Intermediate futures to the lowest settlement since Oct. 6 -- the day before Hamas militants attacked Israeli civilians. While Israel is currently expanding its military offensive into northern Gaza, there are few signs the conflict would entangle other regional players like Iran or Saudi Arabia.

Israeli Defensive Force spokesperson, General Daniel Hagari, said Monday morning Israeli armed forces killed dozens of Hamas fighters overnight and struck multiple targets in northern Gaza situated approximately 2 miles into the strip.

"The fact that the conflict has so far had only modest impacts on commodity prices may reflect the global economy's improved ability to absorb oil price shocks. Since the energy crisis of the 1970s, countries across the world have bolstered their defenses against such shocks," said The World Bank on Monday.

Still, The World Bank warns that sudden escalation of hostilities could easily push oil prices above $100 per barrel (bbl).

The report outlines three risk scenarios based on historical experience since the 1970s, with price effects reflecting the degree of disruption to oil supplies.

Under a "small disruption" scenario, global oil supply would be reduced by 500,000 barrels per day (bpd) to 2 million bpd -- roughly equivalent to the reduction seen during the Libyan civil war in 2011.

In a "medium disruption" scenario -- roughly equivalent to the Iraq war in 2003 -- global oil supply would be curtailed by 3 million bpd to 5 million bpd.

In a "large disruption" scenario -- comparable to the Arab oil embargo in 1973 -- global oil supply would shrink by 6 million bpd to 8 million bpd. That would drive prices up by 56% to 75% initially to between $140 per bbl and $157 per bbl.

On the macroeconomic front, investors await the release of key gauges on U.S. manufacturing and service sectors of the economy published by the Institute of Supply Management. Both data points are expected to show steady business conditions amid still-strong consumer demand and a solid labor market. The U.S. Department of Labor will release its October non-farm employment report on Friday, with consensus heavily leaning toward 186,000 new jobs created by the economy, down from 336,000 reported in September, but still considered a robust employment figure if realized.

In addition, the Federal Open Market Committee will hold a monetary policy meeting on Tuesday and Wednesday and decide on the path for interest rates, with the federal funds rate currently standing at a 22-year high in a 5.25%-5.5% target range. Market consensus heavily leans towards no change in the federal funds rate either on Wednesday, Nov. 1, or at their Dec. 13 meeting, according to CME's FedWatch Tool. Some Federal Reserve officials suggested, however, there might be one more increase introduced before the end of the year.

At settlement, NYMEX WTI futures for December delivery dropped back to $82.31 per bbl, down $3.23, and international crude benchmark Brent for December delivery on Intercontinental Exchange declined $3.03 per bbl to $87.45 per bbl. Next-month January futures expanded the discount against the expiring contract to $1.10 per bbl. NYMEX November ULSD futures retreated $0.0856 to $2.9663 per gallon, with the next-month December contract falling to $2.8841 per gallon. NYMEX RBOB November futures moved down $0.0925 to $2.2200 per gallon, and December RBOB contract on NYMEX declined $0.0784 to $2.2168 per gallon. December Brent, November ULSD and RBOB futures expire Tuesday afternoon.

Liubov Georges can be reached at liubov.georges@dtn.com

Liubov Georges