Oil Rally Extends on Fears of Significant Escalation in Israel-Lebanon Conflict

• Brent crude rose above $86 per barrel on Thursday.
• Last week, Israeli Prime Minister Benjamin Netanyahu said that with Gaza operations gradually winding down, the shift will now be to Lebanon and Hezbollah.
• Markets are concerned that a war between Israel and Lebanon would quickly turn into a significantly escalated proxy war.

Brent crude overtook $86 on Thursday as fears of an all-out war between Israel and Lebanon took center stage, with Iraq’s Iran-backed militias vowing to strike U.S. interests in the Middle East if Israel launches a large-scale campaign against Hezbollah in southern Lebanon. 

Overnight, an Israeli strike on southern Lebanon injured more than 20 people after hitting a residential building in the city center of Nabatieh, with Lebanese news agencies saying there were no casualties and injuries were not critical. 

German Foreign Minister Annalena Baerbock on Wednesday urged restraint, warning that any “miscalculation” could trigger an all-out war between Israel and Hezbollah, saying that “with every rocket across the Blue Line between Lebanon and Israel, the danger grows that a miscalculation could trigger a hot war,” The National reported. Earlier this week, the leader of Asaib Ahl al-Haq (League of the Righteous), a powerful Iran-backed militia in Iraq on the U.S. foreign terrorist organization list, told public TV that American interests in the region will be targeted if Israel strikes. 

Last week, Israeli Prime Minister Benjamin Netanyahu said that with Gaza operations gradually winding down, the shift will now be to Lebanon and Hezbollah, as reported by CNN. 

Markets are concerned that a war between Israel and Lebanon would quickly turn into a significantly escalated proxy war in multiple venues with Iran, potentially threatening future oil supply. 

Those concerns intensified on Thursday after disappointing U.S. inventory data from the previous day had reduced demand optimism. On Wednesday, the U.S. Energy Information Administration (EIA) reported a 3.6-million build in oil inventory, against expectations of a 2.9-million-barrel build from analysts polled by Reuters. Gasoline stockpiles also saw a far greater build than analysts had been expecting. 

At 11:08 a.m. ET on Thursday, Brent crude was trading up 1.01% at $86.11, and West Texas Intermediate (WTI) was trading up 0.99% at $81.70. 

By Tom Kool for Oilprice.com

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