Oil prices up on Iranian assault on Israel, all eyes on Aussie producers

All eyes will be on the Australian stock market’s biggest oil producers on Wednesday following a spike in oil prices overnight, fuelled by growing tensions in the Middle East.

US crude oil prices rose more than 2 per cent overnight Tuesday, coming off session highs of more than a 5 per cent rise as traders assessed whether a missile attack by Iran against Israel would lead to further escalation in the troubled region.

Crude rose 1.5 per cent in early Asian trading on Wednesday, while bonds, gold and the US dollar also climbed following Tehran’s sharp but brief strike in reprisal for Israel’s attacks on Lebanon in recent days.

Energy and gold stocks were among the biggest movers on the ASX200 minutes into the session.

Karoon Energy was up 5.4 per cent and Beach Energy 3.4 per cent at 10.40am while Woodside Energy rose 3.1 per cent. Santos jumped 2.4 per cent.

Gold miner Genesis Minerals was up 2.9 per cent and Gold Road Resources rose about 1.8 per cent, while Northern Star managed just a 0.7 per cent rise. Newmont was up 1.8 per cent.

The overall market was down 0.7 per cent to 8208.2 points at 10.40am.

“There has been a lot of complacency about this war,” Helima Croft, head of global commodity strategy at RBC Capital Markets said.

Traders have largely dismissed the threat of oil supply disruptions from simmering tensions in the Middle East, she said.

The question now is whether Israel might target Iran’s nuclear facilities or oil infrastructure in response to the attack, Ms Croft said. Iran is producing at a five-year high of over 3 million barrels per day.

“We do need to think about a scenario where Iranian oil supplies are at risk,” Ms Croft said.

Focus on Israel response

Oil market and geopolitical analysts have repeatedly warned this year that an Israeli incursion into Lebanon could be the trip wire that leads to a regional war with Iran, increasing the risk of crude supply disruptions.

The impact on the oil market will depend on the “scope and damage” caused by an Iranian attack, which in turn will drive Israel’s response, said Bob McNally, president of Rapidan Energy.

Iran and Israel came to blows in April but ultimately backed away from a full-blown conflict. Iran launched hundreds of ballistic missiles and drones against Israel, after the government of Prime Minister Benjamin Netanyahu struck an Iranian diplomatic compound in Syria.

The US, Israel and other allies foiled Iran’s April missile attack, giving the Netanyahu government room for a small retaliatory strike in Iran that did not lead to a further cycle of escalation.

Mr McNally said “the crude risk premium should quickly dissipate” if there is a repeat of “April’s failed Iranian and restrained Israel exchanges”.

The analyst cautioned, however, that Israel has increasingly adopted a “three eyes for an eye” approach to attacks from regional enemies.

“If Iran attacks and causes damage, then the escalatory cycle could leg up quicker to sustain and even increase a geopolitical risk premium,” McNally said.

Tensions escalate

The Israel Defense Forces identified about 180 missiles fired from Iran toward Israel. Most of the missiles were intercepted, though several hits have been identified, an Israeli security official told NBC News.

The IDF is assessing the situation and is not currently aware of any casualties, said military spokesman Daniel Hagari.

“This attack will have consequences,” Hagari said. A senior White House official told NBC News earlier that the US would help defend Israel and warned Iran that an attack would “carry severe consequences.”

Tensions in the Middle East have dramatically escalated over the past week, as Israel has pounded the Iran-backed militia Hezbollah with airstrikes, killing the group’s leader, Hassan Nasrallah. Israel dispatched ground forces into southern Lebanon on Tuesday.

Wall Street reacts

Stocks retreated overnight Tuesday in the US as the growing tensions poured water on investor enthusiasm coming off a strong quarter.

The Dow Jones Industrial Average fell 173.18 points, or 0.41 per cent, to 42,156.97. The S&P 500 pulled back 0.93 per cent to 5708.75, while the Nasdaq Composite lost 1.53 per cent to finish at 17,910.36.

West Texas Intermediate crude oil spiked after the Israel Defense Forces said Iran was firing missiles at the country. The CBOE Volatility Index, also known as Wall Street’s fear gauge, topped 20 at its high of the day, underscoring the rising concern among traders.

But oil settled off its session highs and stocks moved off their lows after the Iran attack as traders hoped damage and subsequent Israel retaliation would be minimal.

“The fear of contagion is always destabilising,” said Keith Buchanan, senior portfolio manager at Globalt Investments. “Aside from, of course, the paramount impact on lives, the markets take a direct hit when there are forces that are almost promising some level of destabilization.”

More than 3 out of every 5 S&P 500 stocks were lower in the session, highlighting the broad troubles for the market. But energy names notably diverged following the Middle East report, with the S&P 500 sector climbing more than 2 per cent.

Tech names felt the brunt of Tuesday’s declines, explaining the Nasdaq’s outsized losses. Tesla, Nvidia and Apple all ended the day lower. But Facebook parent Meta Platforms bucked this trend, posting an all-time intraday high.

Small-cap stocks also took a hit, with the Russell 2000 sliding 1.5 per cent.

Traders were also monitoring a strike by members of the International Longshoremen’s Association on the East and Gulf coasts. While consumers may not feel the pinch immediately, the stoppage could cost the US economy hundreds of millions of dollars.

Stocks come off winning month and quarter

Tuesday’s pullback comes after the S&P 500 and the Dow notched closing records in the previous session, which marked the end of the trading month and quarter. September is typically the worst month of the year for stocks, but this time it broke with past trends.

All three major averages posted monthly gains, and it was the first positive September for the S&P 500 since 2019. The S&P 500, Dow and Nasdaq also ended the third quarter in positive territory.

Stocks advanced Monday even after Federal Reserve Chair Jerome Powell said the central bank is “not on any preset course” when it comes to the next steps for rate policy. He said to expect two more cuts this year — that is, a quarter percentage point each — if the economy performs as anticipated.

Investors will now look to September’s nonfarm payrolls report on Friday, which could serve as a catalyst for the major averages.

with CNBC and Bloomberg