Oil prices extend rally as prospect of Middle East war sparks supply worries

Crude oil futures jump nearly 3% in Wednesday’s trading, extending gains that followed Iran’s missile attack on Israel.

The direct involvement of Iran raises the potential for oil supply disruptions, and any sustained rally in oil prices will be determined by Israel’s response with its own attack on Iran’s military, infrastructure or oil industry.

Oil could climb as much as $7/bbl if the U.S. and allies placed economic sanctions on Iran, by $13/bbl if Israel strikes Iranian energy infrastructure, and by as much as $28/bbl if flows are blocked in the Strait of Hormuz, according to preliminary estimates from Clearview Energy Partners.

But Goldman Sachs says oil’s geopolitical risk premium “remains moderate, likely as a result of high spare capacity and recently limited actual production disruptions.”

Iran’s oil output rose to a six-year high of 3.7M bbl/day (bpd) in August, according to analysts at ANZ Bank.

In the event of major and prolonged disruptions in the Middle East, the U.S. could tap the Strategic Petroleum Reserve, which currently holds ~383M barrels, slightly above year-ago levels but near its lowest level since the 1980s.

Front-month November Nymex crude oil (CL1:COM) +2.9% at $71.88/bbl, and front-month December Brent (CO1:COM) +2.7% at $75.53/bbl.

ETFs: (NYSEARCA:USO), (BNO), (UCO), (SCO), (USL), (DBO), (DRIP), (GUSH), (USOI)

Energy stocks (NYSEARCA:XLE) add to gains in the previous session, including Diamondback Energy (FANG) +2.9%, Petrobras (PBR) +2.3%, Devon Energy (DVN) +1.8%, Exxon Mobil (XOM) +1.4%, SLB (SLB) +1.4%, Baker Hughes (BKR) +1.4%, Shell (SHEL) +1.4%, BP (BP) +1.1%.