Oil prices extend gains, Brent stays above $100 a barrel on Mideast worries

Brent crude oil surged past $100 per barrel for the first time since July, driven by escalating tensions in the Persian Gulf. This upward momentum has continued into early trading, reflecting the market's continued pricing of geopolitical risks. Iran has declared its readiness to escalate the conflict, while US President Trump has indicated that the war could persist until early November, after the midterm elections.

The prospect of heightened tensions raises concerns about potential disruptions to oil flows through the Strait of Hormuz. While oil supplies have been surprisingly strong in recent weeks, a further tightening of supplies could occur if the ongoing escalation leads to disruptions once more.

China has been a stabilizing force in the market, increasing its physical market activity, particularly in the North Sea. Despite its efforts, China's crude oil imports remain significantly lower than last year's levels but are starting to recover, suggesting potential for further growth in demand.

The outlook for the market hinges heavily on Chinese buying behavior. Their actions will determine whether this rally maintains its upward momentum or loses steam. Beyond Persian Gulf disruptions, OPEC+ members may face increasing disagreements. Reports suggest Iraq is seeking a substantial increase in its output quota, aiming for 6 million barrels per day as a baseline for quota calculations.

This is considerably higher than the International Energy Agency's estimate of Iraq's sustainable production capacity of 4.9 million barrels per day.

This request from Iraq, if implemented, could potentially lead to an oversupply if other producers do not follow suit. US crude oil inventories declined by 300,000 barrels over the past week, while gasoline stocks fell by 1.9 million barrels. Distillate inventories, however, increased by 2 million barrels.

The Energy Information Administration's upcoming inventory report is expected to provide further clarity. Recent reports also indicate that Ukrainian drones have targeted gas processing plants in Russia's Yamal region, adding another layer of uncertainty to the European energy market. Currently, European natural gas prices have risen, with the TTF briefly surpassing EUR80 per megawatt-hour, its highest level since early 2023.

The disparity between the JKM-TTF spread may provide some support, but the situation remains precarious. European gas storage levels are at around 67% of capacity, significantly below the five-year average of 84%. As the market braces for the upcoming heating season, this vulnerability could exacerbate energy price pressures.