Oil prices in spotlight as Iran warns of escalation of Israel-Hamas war

By William Watts

'There is a risk of an escalation of this conflict,' White House national security adviser Jake Sullivan says

Oil futures were being watched as a bellwether late Sunday as Western diplomats and leaders warned Iran not to wade into the Israel-Hamas war, as Israeli forces appeared on the verge of a ground invasion of Gaza.

"The energy markets are the first derivative to drive broad market sentiment this week, with crude and Nat Gas leading investors to trade volatility (options), as well as classic hedges such as gold and Treasuries," said Chris Weston, head of research at Melbourne-based broker Pepperstone, in a note.

Crude opened slightly lower, with West Texas Intermediate crude futures (CL00) (CL.1) falling 30 cents, or 0.3%, to $87.39 a barrel on the New York Mercantile Exchange on Sunday night.

See: Israel-Gaza conflict threatens to reawaken U.S. inflation, investors worry

Axios on Saturday reported that Iran had delivered a message to Israel that it didn't want an escalation of the Israel-Hamas war, but would have no choice but to intervene if the Israeli operation in Gaza continued.

On Sunday, Iran's foreign minister warned of escalation, saying others in the region were prepared to act, Reuters reported, citing Iran's semiofficial Fars news agency.

"If the Zionist aggressions do not stop, the hands of all parties in the region are on the trigger," the Fars report said, quoting Hossein Amirabdollahian.

Israel's military on Sunday declared its northern border with Lebanon closed in response to attacks by Hezbollah, amid fears the Iran-backed group could open a second front, news reports said.

"There is a risk of an escalation of this conflict, the opening of a second front in the north, and of course of Iran's involvement -- that is a risk," White House National Security Adviser Jake Sullivan told CBS News' Face the Nation on Sunday morning. "And that's a risk that we have been mindful of since the start."

Sullivan said that risk was why President Joe Biden had moved quickly to shift naval forces, including aircraft carriers, into the eastern Mediterranean and the Persian Gulf. The moves were "a very clear message of deterrence to any state or any actor that would seek to exploit this situation," he said.

French President Emmanuel Macron warned Iranian President Ebrahim Raisi in a Sunday phone call against any escalation of the Israel-Hamas conflict, according to Reuters.

"The president of the republic warned President Raisi against any escalation or extension of the conflict, especially to Lebanon," Macron's office said in a statement.

Given Tehran's relations with Hezbollah and Hamas, it has a responsibility to avoid an escalation and "must do everything possible to avoid a regional flare-up," the statement added.

Oil rose sharply on Friday, with traders appearing reluctant to hold short positions ahead of the weekend. West Texas Intermediate crude and Brent crude (BRN00), the global benchmark, both jumped nearly 6% in Friday's session.

Fears the Israel-Hamas war could spill over, perhaps involving Iran and threatening oil supplies from the Mideast, saw traders rebuild a risk premium after an initial spike last Monday was mostly erased in subsequent sessions.

The rally also received a significant boost following a commitment from G-7 nations to enhance sanctions on Russian oil exports, noted Stephen Innes, managing partner at SPI Asset Management, in a note.

Fears of escalation weighed on the stock market Friday, though the Dow Jones Industrial Average DJIA broke a streak of three consecutive weekly losses and the S&P 500 SPX scored a second straight weekly gain. Long-dated Treasury yields fell as investors snapped up government debt in a flight to quality, unwinding part of a sharp jump in yields that had weighed on stocks since late July. Yields and debt prices move opposite each other.

"The bear case for risk, given the potential for a significant rally in [European natural gas} and crude, would be where the market increases the probability of Iran curtailing the movement of LNG (liquefied natural gas) through the Strait of Hormuz, where notably Qatar LNG supply (20% of the global LNG market) would be impacted. Again, this seems a low probability at this stage, but that will depend on Iran's ongoing involvement and any new sanctions placed on them," Pepperstone's Weston said.

-William Watts

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10-15-23 1816ET

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