Global oil prices have climbed since the war between Israeli forces and the Palestinian militant group Hamas broke out on Saturday. There are fears that the conflict could embroil the wider Middle East, a region that produces most of the world’s petroleum, affecting global crude oil output and inflation.
Crude Oil Prices Rise As Israel-Hamas War Escalates
On Monday, the global Brent Crude benchmark rose 4.2% to $88.15 a barrel, while the U.S. West Texas Intermediate (WTI) benchmark rose 4.3% to $86.38 per barrel, reversing some of the decline suffered in previous weeks.
Just last week, Brent and WTI fell about 11% and 8%, their biggest weekly decline since March. Now there is more concern about global oil demand as the macroeconomic outlook darkens.
Though neither Israel nor Palestine are oil producers, markets are worried that the war could cause instability in the Arabian peninsula, which is also home to some of the world’s largest oil producers – Iran and Saudi Arabia – as well as the Strait of Hormuz bordered by the UAE, Oman, and Iran, a key transit route that facilitates the transport of about 15% of global oil supply.
However, some analysts say that the immediate effect of the war on energy prices will most likely be limited due to it not directly involving oil-producing countries. Oil prices had risen following Russia’s military action against Ukraine because Russia is a major producer and exporter of crude oil and natural gas.
In the wake of the conflict, Israel has shut down its oil terminal and port in Ashkelon.
Economy and trade analysts also say that a probable hike in oil prices holds major implications for the wider economy and consumers as it will have a direct effect on the costs of products that depend on oil for production and transportation.
In Monday’s note to investors, banking giant Morgan Stanley wrote that the near-term risk to oil supply was low but the situation could change if the conflict escalated to other countries in the Middle East.
S&P Global Commodities Insights said the global energy markets are closely watching the fallout.
War Could Derail Efforts to Normalize Relationship Between Saudi Arabia and Israel
The violence also threatens to derail the U.S.-led effort to normalize ties between Saudi Arabia and Israel in return for a defense deal between Washington and Riyadh. A day before Hamas attacked Israel, Saudi officials told the White House that they were willing to raise crude oil outputs for next year as part of the proposed deal with Tel Aviv.
Goldman Sachs reports that the war has reduced the likelihood of normalization of Saudi Arabia’s relationship with Israel and the subsequent boost in oil production as agreed earlier. The bank noted that there wouldn’t be any major effect on near-term oil inventories as a result of the violence.
In September, Russia and Saudi Arabia agreed to voluntarily cut crude oil output by a combined 1.3 million barrels per day until the end of 2023. News of the war would add more fuel to the fire by tightening the global oil supply for the rest of the year.
Iran’s Involvement in the War Could Complicate the Issue Even Further
Much of the concern regarding who perpetuated the conflict centers around Iran because it funds the terrorist group that carried out the surprise attack on Israel, which has resulted in the killing of at least 900 people while leaving 2,600 others injured.
There is also worry that the conflict could potentially slow down Iranian exports, which have grown significantly this year after Washington and Tehran resumed talks over a nuclear program.
Caroline Bain, the chief commodities economist at Capital Economics, said that if the U.S. were to ascertain that Iran was involved in Hamas’ attack, the White House could enforce economic sanctions over Tehran more strictly. Earlier this week, the Wall Street Journal published a report claiming Iranian security officials helped plan the assault on Israel.
Although it did congratulate Hamas following the attack, Tehran has denied all speculations of its involvement in the war,
In an interview with CNBC, Bob McNally, the president of Rapidan Energy Group, warned that oil prices could surge by $5 to $10 a barrel if Iran was to be drawn into the conflict. However, he expressed doubts about Israel engaging militarily with Iran.
Gas Prices Would Remain Low in the West Due to Seasonal Changes
If the war were to expand beyond Palestine and Israel, there would surely be an increase in crude oil prices but gas prices would not necessarily follow, noted Patrick de Haan, the head of petroleum analysis at GasBuddy.
He cited that a seasonal shift in the West from busy summer travel to relatively quiet fall months has reduced the demand for gasoline. De Haan believes that even if oil prices were to remain high for a prolonged period, the drop in demand for petroleum could help prevent prices at gas stations from rising.
However, higher crude oil prices could result in the cost of products that depend on fossil fuels for production and transportation to surge as companies would pass along added expenses to their consumers, warned Timothy Fitzgerald, professor of business economics at Texas Tech University.
Crude Oil Price Surge Could Curtail Fed’s Attempts to Fight Recession
He added that the situation would complicate the Federal Reserve’s effort to reduce inflation and avert a recession in the U.S. economy while achieving a “soft landing”. Although inflation has fallen sharply from its peak of almost 9% in 2022, it still remains more than a percentage above the Fed’s 2% target rate.
Higher oil prices due to the conflict could increase inflation, forcing global central banks to hike interest rates. Thus fueling fears of a global recession that may be bigger than the 2008 financial crisis.