Global oil prices have witnessed a significant spike due to the ongoing conflict between Israel and Hamas. On Monday, Brent Crude and West Texas Intermediate surged by 4.2 percent and 4.3 percent, respectively, amid concerns about potential disruptions to energy production in the Middle East.
Although Israel and Gaza are not major oil producers themselves, the conflict has instilled fears of broader regional instability. The Middle East houses key oil-producing nations such as Iran and Saudi Arabia, as well as critical transit routes like the Strait of Hormuz, known as the world’s most vital “oil chokepoint.”
The immediate impact on energy prices is expected to be limited, unlike the sharp increase in oil prices following Russia’s invasion of Ukraine last year. The conflict between Israeli soldiers and Hamas fighters, while tragic, does not directly involve oil-producing nations.
Morgan Stanley has stated that the near-term risk to oil supply is low, but this could change if the conflict spreads to other countries. Mike Rothman, President and Founder of Cornerstone Analytics, has emphasized that the upside risk to crude prices from this event is limited in the short term. He also believes the conflict is unlikely to impact global demand and OPEC production in the long term, although other factors like declining oil inventories elsewhere could influence prices.
Two critical factors to monitor are the involvement of Iran or Hezbollah, a Lebanon-based armed group allied with both Hamas and Iran. The potential implication of Iran in the conflict could impact oil prices, as former US President Donald Trump reimposed sanctions on Iran’s oil industry in 2018. Any evidence of Iranian involvement may lead to further US sanctions on Iranian energy.
Alan Gelder, an analyst at Wood Mackenzie, has highlighted the possibility of more stringent enforcement on Iranian exports by the US if the conflict escalates, potentially impacting the oil market. Bob McNally, President of Rapidan Energy Group, has suggested that oil prices could surge by $5 to $10 a barrel if Iran becomes entangled in the conflict.
However, some experts express doubts about direct military engagement between Israel and Iran. Rothman believes that Israel’s response would require more concrete evidence of Iran’s involvement.
While the current oil price surge may evoke memories of the 1973 oil crisis, the situation today is fundamentally different. Rothman points out that the likelihood of a dramatic price spike akin to the ’73 embargo is near-zero, given the lessons learned from that period.
The present conflict in the Middle East is a complex geopolitical issue with potential ramifications for the global oil market. As events unfold, the world will closely watch for any developments that could impact oil prices and supply.
