Oil markets are witnessing an impressive surge, marking the largest weekly gain in over a year, primarily driven by escalating tensions in the Middle East. Following cryptic remarks by U.S. President Joe Biden regarding potential Israeli strikes on Iran's oil sector, oil prices have surged significantly.

Rising Concerns Over Oil Supply

The benchmark WTI crude oil has surged 9% for the week, reaching USD 74.38 a barrel, its highest level in five weeks. This rise in oil prices stems from escalating geopolitical tensions following Iran's recent attack on Israel. Despite the sharp increase, current prices remain below the peaks seen earlier in the year. Historically, similar conflicts involving Iran had driven prices well above the $100 mark.

Another factor contributing to the surge in oil prices is the strong U.S. job market. Employers added an estimated 254,000 jobs in September, according to data recently released by the Bureau of Labor Statistics. This robust indicator suggests that the U.S. fuel demand could rise as a result.

OPEC+ Balancing Act

OPEC+, the coalition of oil-producing nations, faces a dilemma. Collectively, the group has an incentive to reduce production to boost prices, but individual member countries often prefer increasing production to support their national budgets. This balancing act presents a significant diplomatic challenge for the cartel. Saudi Arabia's recent production cuts are aimed at maintaining price stability, signaling that OPEC+ could potentially offset any shortages from Iranian oil if needed.

Market Uncertainties Persist

Weaker Chinese demand and reduced supplies from Saudi Arabia have kept oil prices in check so far this year. However, the current Middle East conflict raises new challenges for the market. The threat of further escalation poses significant risks, particularly concerning the Straits of Hormuz—a critical passage for a large portion of global oil and LNG traffic. Any blockades in this vital waterway could lead to severe disruptions, further destabilizing the global oil market.

Oil ETFs performance

Crude Oil ETFs gained 5.40% last week, bringing their year-to-date performance to -2.38%. Energy ETF also fared well, gaining 8.22% over the week. The iShares S&P/TSX Capped Energy Index ETF (XEG) and the Ninepoint Energy Fund (NNRG) increased by 8.49% and 7.98% respectively.

Here's a comparison between Oil and Energy ETFs

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Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.