Geopolitical tensions in the Middle East have caused oil prices to experience their strongest gains since March 2023. This week, prices tested two-month highs. Analysts believe that if the conflict escalates, the upward trend may continue.

Notably, Israeli Prime Minister Benjamin Netanyahu stated that airstrikes killed two successors to Hezbollah's slain leader. The country is expanding its offensive against the Iran-backed group, with ground operations extending into southern Lebanon.

Will Oil Prices Return to $100 per Barrel?

Although projections of oil prices jumping back to the psychological barrier of $100 per barrel, last seen in 2022, currently seem distant, analysts are beginning to raise their forecasts for the end of this year.

Morgan Stanley recently raised its Brent price forecast for Q4 2024 to $80 per barrel from $75, citing heightened geopolitical risks. Brent crude prices have already tested such high levels this week, while US WTI crude has so far stopped at around $78.

However, Tuesday's session brought a temporary easing of sentiment in the oil market, as concerns about the Middle East conflict outweighed stronger worries about global demand.

Oil Prices Fell over 4% on Tuesday

Brent crude futures fell 4.2% to $78.25 a barrel, while US WTI crude dropped 4.1% to $74.80 per barrel. The decline comes after both benchmarks surged nearly 9% last week.

The retreat in oil prices reflects a complex interplay of factors influencing the market. While heightened tensions in the Middle East have raised concerns about potential supply disruptions, these fears have been tempered by the absence of actual production interruptions thus far.

“Oil can keep ascending only for so long purely based on perceptions and not actual supply disruption,” noted analysts at oil brokerage PMV. “The geopolitical risk premium has an obscure and unforeseeable expiry date.”

Adding to the downward pressure, China's return from its Golden Week holiday brought disappointment as authorities refrained from announcing new economic stimulus measures. This has reignited worries about oil demand in the world's second-largest economy.

“Without policy support, an economic slowdown could keep China's oil demand subdued in the short to medium term,” Warren Patterson from ING added.

The fact that the war premium in the oil market disappeared one day doesn't mean it won't reappear the next, especially since it doesn't look like we're approaching any resolution to the conflict.

Israel Claims Elimination of Hezbollah Leader's Successors

Israeli Prime Minister Benjamin Netanyahu announced today (Wednesday) that airstrikes had killed two successors to Hezbollah's recently slain leader, Hassan Nasrallah, as Israel intensified its ground offensive in southern Lebanon.

“We've degraded Hezbollah's capabilities. We took out thousands of terrorists, including Nasrallah himself and Nasrallah's replacement, and the replacement of the replacement,” Netanyahu declared in a video statement. However, the prime minister did not identify the alleged successors by name.

Israeli Defense Minister Yoav Gallant suggested that Hashem Safieddine, widely considered Nasrallah's likely successor, had “probably been eliminated.” Military spokesman Daniel Hagari later stated that Safieddine's status was being verified after an airstrike on Hezbollah's intelligence headquarters last week.

The claims come as Israel deployed a fourth army division into southern Lebanon, expanding its ground operations against Hezbollah. The Israeli military reported that airstrikes over the past 24 hours had killed at least 50 Hezbollah fighters, including six sector commanders and regional officials.

The conflict has escalated dramatically in recent weeks. Israel bombed Hezbollah strongholds in Beirut's southern suburbs and Hezbollah launched rocket attacks on northern Israeli cities, including Haifa.

As the violence intensifies, concerns are growing about a wider regional conflict. Iran, a key backer of both Hezbollah and Hamas, has warned Israel against retaliatory strikes on Iranian territory following recent missile exchanges.

The ongoing hostilities have resulted in over 1,000 deaths in Lebanon and displaced more than a million people in the past two weeks. Israel maintains that its objective is to secure its northern border and allow the return of thousands of displaced residents.