The escalating violence between Israel and Hamas has triggered a surge in oil prices, as fears of a wider regional conflict and potential disruptions to oil supply loom large. Brent crude, the global benchmark, rose 4.2% to $88.15 a barrel on Monday, while U.S. West Texas Intermediate crude climbed by 4.3% to $86.38 a barrel.
The sudden spike in oil prices came after Hamas launched a massive rocket attack on Israel on Saturday, prompting Israeli retaliation with air strikes on Gaza. The conflict, which has killed dozens of people and injured hundreds more, is the worst in years and threatens to spiral out of control.
The Middle East is home to some of the world’s largest oil producers and exporters, including Saudi Arabia, Iraq, Iran, and the United Arab Emirates. Any disruption to their output or exports could significantly impact the global oil market, which is already tight due to the voluntary production cuts by OPEC+ and the slow recovery of demand from the coronavirus pandemic.
Analysts said the main risk for oil supply is if Iran, which backs Hamas and other militant groups in the region, gets involved in the conflict or faces more U.S. sanctions. Iran’s oil exports have increased this year despite U.S. sanctions, as it has found ways to evade them and sell its crude to China and other buyers. However, if the U.S. decides to crack down on Iran’s oil shipments or resume its “maximum pressure” campaign, it could reduce Iran’s oil supply to the market.
Another risk factor is the potential derailment of the U.S.-led efforts to broker a rapprochement between Saudi Arabia and Israel, which would involve the kingdom normalizing ties with Israel in exchange for a defense deal with Washington. Such a deal could also pave the way for Saudi Arabia to increase its oil production next year as it seeks to diversify its economy and boost its revenues.
However, the current conflict could undermine the prospects of such a deal, as Saudi Arabia and other Arab countries have expressed their solidarity with the Palestinians and condemned Israel’s actions. Goldman Sachs said that the conflict reduced the likelihood of normalization of Israel’s relations with Saudi Arabia and the associated boost to Saudi production over time.
On the demand side, due to security concerns, oil prices could also face pressure from major international airlines’ suspension or reduction of flights to or from Israel. Moreover, higher oil prices could fuel inflation and force central banks to raise interest rates sooner than expected, dampening economic growth and oil consumption.
Despite these uncertainties, some experts said that the conflict is unlikely to have a lasting impact on oil prices unless it escalates into a full-scale war that involves other regional powers or disrupts major oil facilities or transit routes. They also said that OPEC+ has enough spare capacity to compensate for supply losses if needed.
The conflict in Israel and Gaza is a reminder of the geopolitical risks that still exist in the Middle East and their potential implications for the oil market. However, it also shows the resilience and flexibility of oil producers and consumers in coping with such challenges. As long as dialogue and diplomacy prevail over violence and confrontation, there is hope for peace and stability in the region.
Source: Reuters
