Oil prices fell more than $1 a barrel on Tuesday as the market took advantage of the previous session’s rally. The rally had risen to its highest level in more than a month on fears the Middle East could be on the brink of a regional war.
Brent crude futures fell $1.31, or 1.6%, to $79.62 a barrel by about 0600 GMT. WTI crude futures fell $1.29, or 1.7%, to $75.85 a barrel.
Both contracts rose more than 3% on Monday to their highest levels since late August, adding to last week’s 8% gain. That was the biggest weekly gain in more than a year on concerns that escalating conflict in the Middle East could disrupt oil supplies.
The clashes intensified after Iran-backed Hezbollah fired rockets at Haifa, Israel’s third-largest city, and Israel appeared ready to expand its offensive into Lebanon a year after the Hamas offensive that launched Israel’s ongoing war in Gaza.
Geopolitical tensions in the Middle East remain, but the market has been more subdued recently amid expectations that any disruption to energy supplies could be more measured.
More clarity is expected on how Israel will retaliate against Iran, which could continue to support prices as geopolitical risks are priced in.
The recovery in oil prices began after Iran launched a missile attack on Israel on October 1. Israel vowed to retaliate and is considering its options, with Iran’s oil facilities considered a possible target.
However, some analysts warned that an attack on Iranian oil infrastructure was unlikely and that oil prices could face significant downward pressure if Israel focused on another target.
Even if an attack targeted Iranian oil facilities, the Organization of the Petroleum Exporting Countries said Friday that it had 7 million barrels a day of spare supply capacity to offset the loss of oil production.
But an overreaction by Iran could set off a very difficult period.
Developments in the Middle East will also do little to change the outlook for oil demand, with markets awaiting U.S. inflation data due on Thursday for a view of the world’s largest economy.
China is confident that it will meet full-year economic targets. The country’s National Development and Reform Commission said on Tuesday it was fully confident it would meet its full-year economic targets, as investors worried that slow growth in China could dampen fuel demand.
In the U.S., Hurricane Milton strengthened into a Category 5 storm as it headed toward Florida on Monday after shutting down at least one oil and gas rig in the Gulf of Mexico.
Traders will also be watching the latest U.S. crude inventory data, with analysts expecting inventories to rise by 1.9 million barrels in the week ending Oct. 4.
The American Petroleum Institute (API) is expected to release a count of U.S. inventories at 2030 GMT on Tuesday, followed by the Energy Information Administration’s official count at 1430 GMT on Wednesday.
