Oil heads for second weekly drop as Israel war still contained

Oil was set for a second weekly loss as the Israel-Hamas war remained contained and clouds appeared on the demand horizon.

Global benchmark Brent held near $87 a barrel, after jumping 2.6% on Thursday amid dollar weakness and hints the Federal Reserve is done with tightening. West Texas Intermediate traded below $83. Israel said its troops encircled Gaza City and that a cease-fire wasn’t on the table, even as US President Joe Biden called for a pause to allow time to free more hostages.

There are still risks the conflict could spread and affect oil markets, however. Iran-backed Houthi rebels in Yemen have launched rockets and drones at Israel, while Saudi Arabia’s military is also clashing with the militant group.

“The fact that Israel’s ground invasion of Gaza has commenced without expanding the Israel‑Hamas war has given hope that disruptions to oil supply and trade can be avoided,” Vivek Dhar, an analyst at Commonwealth Bank of Australia, said in a note. Still, “any direct involvement of Iran in the Israel‑Hamas war will initially take Brent oil futures to $100 a barrel.”

Crude has mostly given up its war premium as the conflict hasn’t endangered supplies from the region, the source of about a third of the world’s oil. That’s brought demand concerns back to the fore. Factory activity in China, the biggest importer, moved back into contraction last month, according to data released this week, while US fuel demand remains low and crude stockpiles are rising.

There are also signs of weakening diesel demand in some European countries, with sales slumping in Spain, the UK, Italy and France in September.

Elsewhere, the US stepped up pressure on the United Arab Emirates, a key OPEC producer, in the latest round of Russia-related sanctions. The measures are aimed at entities which trade goods that can be used as dual-use items for President Vladimir Putin’s war in Ukraine and financial services firms.

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