Oil prices went up as much almost 5% after the broadest and bloodiest attack on Israel in decades threatened to inflame tensions in the Middle East, the source of around a third of the world’s oil supply. The situation is still uncertain, and for the oil market everything depends about how Israel responds to Hamas, the terrorist group that launched the attack.
What happened?
Hamas staged a sweeping attack on southern Israel early Saturday. News reports put Israeli deaths at more than 700. The Gaza Health Ministry said 413 people, including 78 children and 41 women, were killed in the territory as Israel retaliated, according to the Associated Press. Injuries in Israel and Gaza were both said to be around 2,000. Israeli troops on Sunday were engaged in fierce fighting in an effort to retake territory in southern Israel as Hamas launched further barrages of missiles. Israeli citizens and soldiers were captured and are being held hostage in Gaza, according to the Israeli military.
Iran remains a very big wild card and we will be watching how strongly the Prime Minister of Israel, Netanyahu, blames Tehran for facilitating these attacks by providing Hamas with weapons and logistical support, said Helima Croft, head of global commodity strategy at RBC Capital Markets, in a Sunday morning note.
Impacts on the market:
The most immediate impact could come if Israel indeed concludes that Hamas acted on instructions of Tehran. In that scenario, oil prices could go much higher. Russia would also benefit from any Middle East oil crisis. If Washington enforces sanctions against Iran, it could create space for Russia’s own sanctioned barrels to both win market share and achieve higher prices. One of the reasons why the White House turned a blind eye on Iranian oil exports is because it hurt Russia.
Oil traders on Sunday said crude prices were likely to remain supported in the near term, as investors assessed the fallout from the surprise attack by Hamas on Israel and focused on the role played by Iran and the potential impact on that country’s petroleum exports. The conflict may also hold market-moving consequences for talks aimed at normalizing relations between Saudi Arabia and Israel. While in the short term there is no impact directly on supply, it’s obvious how things play out over the next 24 to 48 hours could change that, Phil Flynn, an analyst at Price Futures Group in Chicago, told MarketWatch.
Armed conflicts in the Middle East always raises concerns about oil supplies to the rest of the world. That is not in question now, says market strategist Simon Wiersma of ING. The oil price fell 9% last week to $82 per barrel, having previously moved towards $100. That price will rise on Monday due to the unrest and some concerns about oil supplies. It fits with broad concerns about rising interest rates and inflation. But the oil price does not appear to be rising drastically. The impact remains limited, says Jos Versteeg of InsingerGilissen.
Only if Saudi Arabia and Iran take an explicitly different position, and there is further condemnation, can oil prices rise in the oil market where OPEC and partners have announced production cuts, expects market strategist Simon Wiersma of ING. It may not lead to a reduction in production, but sentiment will change and that will also have consequences for the price.”