Oil prices drop after five-day surge amid Middle East tensions, hopes for Chinese stimulus

Oil prices dropped after a five-day rally as traders closely monitored escalating tensions in the Middle East and awaited potential economic stimulus from China following the country’s return from a week-long holiday.

Brent crude dipped below $80 per barrel after a sharp 13% rise over the past sessions, while West Texas Intermediate (WTI) fell near the $75 mark.

The oil market is on high alert as it watches for Israel’s potential military response to Iran following last week’s missile attack, with hostilities intensifying on Monday.

According to Bloomberg, traders remain focused on the possibility of an Israeli strike on Iran in retaliation for the recent missile barrage. Escalating conflicts with Iran-supported groups have sparked fears of broader disruptions, as the Middle East accounts for a third of global crude oil supplies.

These developments have rattled markets, with volatility surging amid uncertainty about the impact on oil flows from the region.

China’s economic outlook in focus

In China, the nation’s top economic planner spoke at a press conference, pledging to boost sustainable, stable, and healthy growth for 2024 and 2025.

Emphasizing the need to expand domestic demand and prioritize consumption, China’s signals of potential stimulus have provided a key counterbalance to geopolitical risks, helping to stabilize market sentiment.

Traders bet on $100 oil amid rising tensions

Oil traders have placed large bets on prices hitting $100 per barrel as risks in the Middle East grow, according to Bloomberg. A surge in crude oil options was seen on Wednesday, triggered if prices breach the $100 mark.

The situation has sparked fears of a broader conflict, with U.S. President Joe Biden urging Israel to avoid targeting Iranian oil fields.

The volatility in oil markets has spread to other sectors, with Brent crude’s implied volatility index hitting its highest level in a year.

Call options, which profit if oil prices rise, surged as investors positioned themselves for further gains. The premium for Brent call options over puts widened to its largest gap in a year by the close of Monday’s trading, highlighting the market's heightened concern over supply disruptions.