Oil Rises as Israeli Strikes on Lebanon Ratchet Tensions Higher

(Bloomberg) -- Oil advanced after an Israeli strike on Hezbollah targets in southern Lebanon raised tensions in the Middle East.

Global benchmark Brent rose toward $80 a barrel, while West Texas Intermediate climbed past $75. Israel sent more than 100 warplanes to take out thousands of Hezbollah missile launchers on Sunday, after which the militant group responded by firing more than 200 projectiles that did limited damage, according to Israeli officials.

Hezbollah, which is backed by Iran and designated a terrorist organization by the US, said it had concluded its military operation for the day, but that it will continue hostilities with Israel until the country agrees to a cease-fire in Gaza. 

Oil is now marginally higher for the year, aided by the geopolitical risks, and a likely US interest-rate cut next month. Federal Reserve Chair Jerome Powell gave his most decisive signal yet that his inflation-fighting mission has been accomplished at his speech in Jackson Hole, Wyoming, on Friday, saying that “the time has come for policy to adjust.” The address cemented expectations for a rate cut next month.

In a sign of relative calm after the exchanges of fire, negotiations in Cairo aimed at establishing a pause in the fighting between Israel and the Palestinian militia Hamas commenced as planned on Sunday. Israel also relaxed safety restrictions on its population on Sunday night, after earlier imposing a state of emergency and shutting its main airport for several hours.

Oil fundamentals have been relatively unperturbed by the flare-up in the Middle East, which provides about a third of the world’s crude. Volatility has remained below a peak at the start of the month, and options skews are still showing a bias toward puts — which profit from lower prices.

“While risks in the Middle East are building following the latest escalation, the market is becoming increasingly immune to these tensions,” said Warren Patterson, head of commodities strategy at ING Groep NV. “It has been going on for almost a year now and is yet to have an impact on oil supply.”

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