Iran's involvement in Mideast conflict 'key focus' for oil markets - Yahoo Finance

Iran's involvement in Mideast conflict 'key focus' for oil markets

Crude oil prices have ticked back up around the uncertainty the Israel-Hamas conflict has presented in energy markets and whether I ran has allied itself with Hamas forces. CIBC Private Wealth U.S. Senior Energy Trader Rebecca Babin joins Yahoo Finance Live to discuss the geopolitical pressures bearing down on oil prices and the greater outlook for global oil production.

"We're seeing a risk premium being built into crude prices on the fears that a country like Iran gets involved and potentially their production is impaired through a direct military strike or we have enforced higher degree of sanctions on their exports," Babin says.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

RACHELLE AKUFFO: --in terms of how much of a game changer Iran's involvement would change things versus some of the other elements as we've seen with commentary from Hezbollah as well?

REBECCA BABIN: So that's a great question. I think Iran's involvement is the key focus for the crude market. And this is essentially because they are a huge oil producer. They are producing over 3 million barrels of crude a day and exporting close to a million barrels a day.

This is a huge factor as we look at how supply could be impacted, right? Right now this conflict does not impact any crude supply. We're seeing a risk premium be built into crude prices on the fears that a country like Iran gets involved and potentially their production is impaired through a direct military strike or we have enforced a higher degree of sanctions on their exports.

So that's really the key. If Hezbollah, which is Iran's proxy, starts to engage Israel from the North, that will be a sign to crude traders that this is escalating. So those two things are really kind of the key focus for the crude market as we look at this terrible conflict as it unfolds.

RACHELLE AKUFFO: And obviously with a lot of these things up in the air, no one has, you know, obviously committed to more countries joining the military action here. But what is this doing in terms of the outlook for oil. And what are the signals that you're paying the closest attention to? And what's going to determine where oil prices go from here?

REBECCA BABIN: So this is an excellent point because if you look at the outlook where we're trading right now, it's still about 7% below where we were on September 28 when we made the highs of the year. And crude was well in the 90s, right?

So the commodity experienced a 13% sell off in the week prior to this horrible situation in Israel. And this was driven by the fact that macroeconomic fears, interest rate concerns, recession concerns, demand destruction concerns started to filter back into crude markets.

Fundamentally, though, the crude market remains very healthy. We are in a place where supply and demand are very closely balanced, if not in a slight supply deficit, heading into the end of the year. The macro factors of what the US dollar does to crude demand from countries remains a huge focus. Is there a recession looming in the US is a huge focus.

When I look at the physical market, though, and the fundamentals, crude actually remains a very well supported anywhere near the 80s in WTI. Now that is also really hinges on what Saudi Arabia does. They have been the key factor holding crude kind of in this stabilized range, let's call it 80 to 95 over the course of the last six months.

They have said that they are going to roll their voluntary cuts until the end of the year but re-evaluate every month. A lot of the fundamental view hinges on what they do next. I think they stand Pat. And we continue to see crude trade really well supported in that low 80s range.

Now, if we get into the 90s, we do start to worry about demand destruction, which I think is a very real thing. And we will start to see those macroeconomic headwinds come into play and kind of keep crude contained. So outside of this geopolitical event, I think crude actually feels like it is grinding kind of on its base here in the 80s and has a potential to move higher should we ease some of the macroeconomic risks. The big question mark obviously is what happens with Israel and this conflict and how much geopolitical risk premium you wanted to apply to potential supply disruptions.