Oil markets go from stable to unpredictable following Hamas terrorist attack

Rashid Husain SyedUntil Saturday morning, everything seemed normal. Oil markets were stable. They were, in fact, on a downward slope. Yet suddenly, literally out of the blue, that changed.

The terrorist attack by Hamas on Israel and Israel’s ferocious counter-attack led to an abrupt change in the oil market’s psyche. Occurring on the eve of the 50th anniversary of the Youm-Kippur Arab-Israel War of 1973, the Hamas attack on Saturday led some to compare its possible impact to that of the 1973 Arab-Israel war and its consequences on oil markets.

At that time, Arab oil producers placed an embargo on oil supplies to the Western world for its support of Israel during the war. Consequently, oil prices jumped. Benchmark WTI oil price shot up by around 267 percent – from about US$3 per barrel to around US$11 a barrel. The world was not ready for this oil shock. Consequently, oil supplies dwindled, and the world changed.

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To some, Saturday events brought back memories of that era. But the comparison mustn’t go that far.

Oil markets were rattled by last weekend’s events but not to the same extent as in 1973. Oil prices jumped more than three percent after hostilities began on Saturday. But the initial jump has been relatively modest – at least so far. Despite a US$2.50 a barrel surge, U.S. crude oil was trading at US$85.30 per barrel on Monday morning. This was the same level at which WTI was languishing on Wednesday, just a few days before the onset of hostilities. Brent crude, the international benchmark, also climbed by US$2.25 a barrel to US$86.83.

While markets are closely monitoring developments, analysts agree that as long as the violence does not spread, oil and gas prices are likely to be unaffected, as neither Gaza nor Israel produce much petroleum.

“The impact on the oil price will be limited unless we see the ‘war’ between the two sides expand quickly to a regional war where the U.S. and Iran and other supporters of the parties get directly involved,” Middle East managing director of energy consultancy Facts Global Energy, Iman Nasseri, told CNBC.

The direction of the market and its intensity will depend on the Israeli reaction. If it goes too far and engulfs Iran in the war, then it could be a different ballgame altogether.

The first and most obvious casualty of the Hamas-Israel conflict seems to be the possible détente between Israel and Saudi Arabia. Behind the scenes, and for months now, the Biden administration has been striving hard to get the two traditional foes to mend their ties. That was finally a real possibility, until the last weekend.

In the wake of the ongoing war and the pro-Palestine sentiments on Arab streets, it may be very difficult for Riyadh to proceed with the proposed deal. As part of the possible truce between Israel and Saudi Arabia, the Saudis were expected to open their oil taps. This would have resulted in further cooling of the oil markets. Biden needed that in an election year.

For the time being, at least, the deal is stymied.

Moreover, if Iran becomes deeply entangled in the conflict, it could have a substantial impact on the global supply and demand equilibrium. Despite sanctions, Washington had seemingly been turning a blind eye to the increasing Iranian crude exports, which were contributing to the stabilization of oil markets during a time when Saudi Arabia, Russia, and other OPEC allies were actively working to restrict output in order to maintain strong oil prices.

If Israel were to strike Iran, the U.S. would be forced to tighten crude sanctions on Iran, leading to a slowing of Iranian crude to market and questions about additional crude from Riyadh.

All these would have an impact on the global crude balance. Markets would tighten.

And, if the war theatre really expands, and Iran gets actively engulfed in the war, this could also mean Tehran may strive to disturb crude shipments through the narrow strategic Straits of Hormuz. Some 17 percent of the global crude passes through the Straits.

However, the possibility of all that happening is still remote, although one cannot write it off entirely.

Toronto-based Rashid Husain Syed is a highly-regarded analyst specializing in energy and politics, with a particular emphasis on the Middle East. Besides his contributions to both local and international newspapers, Rashid frequently lends his expertise as a speaker at global conferences. His insights on global energy matters have been sought after by organizations such as the Department of Energy in Washington and the International Energy Agency in Paris.

For interview requests, click here.

The opinions expressed by our columnists and contributors are theirs alone and do not inherently or expressly reflect the views of our publication.

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