Oil prices posts second straight weekly gain over fears of Israel-Gaza war escalation

US Federal Reserve chairman Jerome Powell's hint at keeping interest rates steady also bodes well for outlook

Israeli Iron Dome system intercepts a rocket fired from the Gaza Strip, in Ashkelon, Israel. It is feared the war could spread to the wider region. AFP

Oil prices reversed earlier gains to settle lower on Friday, but still notched their second straight weekly increase amid concerns that the Israel-Gaza war may escalate into a regional conflict that could disrupt crude supplies.

Brent, the benchmark for two thirds of the world’s oil, declined 0.24 per cent, or $0.22, to close at $92.16 a barrel. West Texas Intermediate, the gauge that tracks US crude, shed 0.69 per cent, or $0.62, to settle at $88.75 a barrel.

Compared to last Friday's close, Brent was up 1.4 per cent, while WTI surged 2.8 per cent.

“Downside momentum on crude prices should be limited given how tight physical markets remain and are expected to be throughout the winter,” said Edward Moya, senior market analyst at Oanda.

“The return of some Venezuelan crude might provide minimal relief for oil prices."

The US has temporarily authorised transactions involving Venezuela's oil and gas sector after a deal was reached between the government and the country’s political opposition to ensure fair elections next year.

In the Middle East, a US warship operating in the Red Sea on Thursday intercepted several drones and missiles launched by Iran-backed Houthi rebels in Yemen and were possibly headed towards targets in Israel.

Washington is on additional alert for activity by Iran-backed groups as regional tensions are heightened by the Israel-Gaza war.

Brent has gained more than 10 per cent since Hamas, which rules Gaza, launched an unprecedented assault on Israel on October 7.

Israel has retaliated with air strikes on Gaza, where the death toll has risen to 3,875. Tel-Aviv is also gearing up for a ground offensive in the Palestinian enclave, home to 2.1 million people.

“The oil market appears to be well-supported from the uncertainty and concern over the escalation of the Israel-Hamas war,” said Ehsan Khoman, head of ESG, commodities and emerging markets research at MUFG.

“Beyond the region, additional support for oil prices came from the release of better-than-expected gross domestic product data in China, as well as drawn-down US inventories."

China's economy, the world's second largest, grew faster than expected in the third quarter, official data on Wednesday showed.

The country's GDP increased 4.9 per cent year on year in July to September period, the National Bureau of Statistics found.

Analysts polled by Reuters had been expecting an expansion of 4.4 per cent.

The Asian country's post-Covid economic recovery lost momentum in the second quarter due mainly to a deepening property slump and weak consumer spending.

China, the world’s largest crude importer, recently announced a string of stimulus measures, including halving stamp duty on stock transactions and easing mortgage rates.

Meanwhile, US crude stocks, an indicator of fuel demand, decreased by 4.5 million barrels in the week that ended on October 13, the US Energy Information Administration said.

“The key consideration for oil markets today is how the US can skilfully navigate pressure to tighten the enforceability of its sanctions on Iranian barrels,” Mr Khoman said.

“We acknowledge that the geopolitical peace discount that the Middle East enjoyed prior to the Israeli-Hamas conflict has once again turned into a geopolitical risk premium. Yet, fundamentals, not geopolitics, remain the fundamental driver of physical assets, like crude oil."

Jeanne Walters, an Emirates NBD senior economist, said comments by US Federal Reserve chairman Jerome Powell hinting at holding interest rates steady at the central bank’s meeting next month could improve the near-term oil outlook.

“Given the uncertainties and risks, and how far we have come, the committee is proceeding carefully,” Mr Powell was quoted as saying on Thursday.

“We will make decisions about the extent of additional policy firming and how long policy will remain restrictive based on the totality of the incoming data, the evolving outlook and the balance of risks.”