Oil prices experienced a significant decline to their lowest point in over three months on Tuesday, effectively erasing all the gains made since the conflict initiated when Hamas attacked Israel on October 7. Hedge funds are betting that the ongoing conflict is unlikely to draw in oil-rich neighboring nations.
The international benchmark, Brent crude, saw a 4.2% drop, settling at $81.61 per barrel. This decline brought the price back to levels last observed in late July, erasing the rally that began in early October. The U.S. benchmark, West Texas Intermediate, also fell by 4.3%, reaching $77.37 per barrel.
Initially, Hamas’s attacks and Israel’s declaration of war raised concerns about a broader conflict that could disrupt oil and gas supplies in the Middle East, causing prices to surge by more than 10% to nearly $93 a barrel in the middle of last month.
However, among traders, these fears have significantly diminished, with many believing that the likelihood of the conflict escalating and involving countries like Iran is nearly zero. Ole Hansen, the head of commodity strategy at Saxo Bank, stated, ‘While the death toll in Gaza from Israeli air strikes continues to rise to unimaginable levels, the prospect of the conflict spreading to the oil-rich part of the Middle East is increasingly being considered near-zero.’
Hedge funds have been unwinding their long positions, which were established following the outbreak of the conflict. In the week ending October 31, they sold more than 70 million barrels of crude oil across Brent and WTI, the two primary market benchmarks, according to data from the U.S. Commodity Futures Trading Commission. Oil prices experienced
Traders are now shifting their focus away from the possibility of escalation in the Middle East and turning their attention to lackluster economic data emerging from the U.S., Europe, and China. Helima Croft, the head of commodity strategy at RBC Capital Markets, explained, ‘Many of them got burnt last year after overestimating the scale of disruption to oil supplies following Russia’s invasion of Ukraine, so they want to see that risk truly materialize before factoring it in. I believe there are still significant risks, but market participants have chosen to move on.'”