Oil Falls As Fading War Premium Revives Angst Over Rates, Growth

A natural gas flare burns near an oil pump jack at the New Harmony Oil Field in Grayville, Illinois, US, on Sunday, June 19, 2022. Top Biden administration officials are weighing limits on exports of fuel as the White House struggles to contain gasoline prices that have topped $5 per gallon. Photographer: Luke Sharrett/Bloomberg

(Bloomberg) -- Oil plunged to the lowest in two months amid signs that the Israel-Hamas conflict will remain contained, bringing angst about interest rates and a slowing global economy back to the fore.

West Texas Intermediate fell 1.6% to near $81 a barrel after Hamas told mediators it will release foreign hostages in the next few days, further damping concerns of the war spreading and impairing crude flows in the Middle East. Oil has now declined below its pre-war levels, reaching the lowest settlement price since Aug. 28.

Oil's downward trajectory over the past few days “continues to point to market expectations of a localized conflict,” said Dan Ghali, a commodity strategist at TD Securities. A bank analysis of geopolitical risk events shows that the premium from a war “tends to fade as soon as one month following the onset of the conflict.”

Crude has had a turbulent October, with prices swinging in a roughly $11 range. Oil started the month with a steep plunge on fears of a longer period of hawkish monetary policy, with selling accelerated by algorithmic trading. Then Hamas's attack in Israel on Oct. 7 sent prices surging on the potential for disruptions in the region that accounts for a third of global flows.

But with the war's contagion fears subsiding, the economic concerns are again taking center stage, sending Brent and WTI to their first monthly declines since May.

While Israeli Prime Minister Benjamin Netanyahu has so far rejected calls for a cease-fire to facilitate the release of captives, the Israeli military is employing a gradual strategy aimed at limiting its own casualties and heeding increasing concerns over the humanitarian crisis in Gaza.

Signs of lackluster demand have arisen in recent days, with manufacturing in China falling back into contraction this month and BP Plc saying gasoline and diesel markets are oversupplied.

A narrowing in WTI's prompt spread — the difference between its two nearest contracts — suggests that near-term conditions are becoming less tight. The widely watched differential has narrowed back to 50 cents a barrel in backwardation, down from about $2 a barrel at the end of September.

--With assistance from Mia Gindis.

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