Oil prices have had a strange year since the war broke out between Israel and Hamas on October 7, 2023.
Exactly a year ago, Hamas, a Palestinian political and militant outfit, launched an attack on southern Israel, killing 1,200 people.
That marked the beginning of the war between Israel and Hamas, which still rages on.
Though Israel and Palestine are not oil producers, there have always been risks that the conflict in the Middle East could become wider, involving prominent oil producers, Iraq and Saudi Arabia in the region.
The Middle East is home to more than half of the world’s oil reserves.
Oil prices have declined since October 2023
Interestingly, even with the ongoing conflict between Israel and Hamas, oil prices have declined since last year.
Brent crude oil is down nearly 10% since the beginning of the war, while the US benchmark, West Texas Intermediate has fallen 12%.
On October 20, 2023, Brent crude oil prices hit $93.79 per barrel, which is the highest in the last 12 months.
Prices had risen as Israel launched its large-scale ground assault in the Gaza Strip in Palestine, marking the beginning of its invasion into the territory.
On October 20 last year, the price of WTI also hit $90.78, a level that it has failed to breach since then.
Both oil benchmarks hovered between $80-$90 during the first month and a half of the Israel-Hamas war.
However, poor global oil demand and no real disruptions to oil supply from the Middle East began to weigh on sentiments. ANZ Research said in a report:
However, the oil market has viewed the risk of supply disruptions as low, as both sides worked to contain the conflict.
Since the beginning of 2024, oil prices have become more resilient to news coming out of the Israel-Hamas war.
The geopolitical risk premium on oil prices had somewhat worn off during the last few months as the market turned its attention to demand concerns.
Poor demand and high supply weigh on demand
In the last few months, oil prices have struggled as demand from the largest importer, China, remained sluggish. Beijing’s economy has been a matter of concern for oil bulls as the country tries to navigate out of a crisis.
In addition, robust oil supply from the largest producer, the US, and other countries have halted oil’s march.
Top energy organizations have cut their forecasts for oil demand growth this year and the next, citing a poor recovery in China’s economy and adequate supply with producers.
Additionally, OPEC+ has enough spare production capacity of crude oil to offset any kind of supply disruptions in the Middle East.
OPEC+ has been withholding around 5.86 million barrels per day of oil from the market. That is nearly 6% of the world’s total supply.
Iran’s attack on Israel renews tensions in Middle East
Last week on Tuesday, Iran fired ballistic missiles toward Israel in response to the killing of a prominent Tehran-backed Hezbollah leader, which escalated the conflict in the region two-fold.
Oil prices soared 8% last week as tensions escalated and traders waited for Israel to respond to Iran’s attack by targeting Tehran’s oil facilities.
Before last week, Brent prices had plunged to below $70 per barrel on demand concerns for the first time since August 2021.
Last week’s escalation proved that even though there has not been a significant disruption in oil supply from the Middle East since last October, a wider conflict can pose a serious threat.
With Iran’s involvement in the Israel-Hamas conflict, there is a possibility of Iraq and other major oil producers in the region getting involved.
Additionally, about 17 million barrels per day of crude oil transits the Strait of Hormuz trade route, which is between the Persian Gulf and the Gulf of Oman.
In case of further escalations, oil tankers transiting the Strait of Hormuz could be targeted and supply could be hit simultaneously.
As we complete a year of the Israel-Hamas conflict, oil is rising again. This time, other countries in the region–Lebanon and Iran–are involved in the conflict too.
According to ANZ Research, the situation could blow out of proportion if Iraq joins the war. Iraq is the second largest oil producer after Saudi Arabia in the OPEC group, and it is home to several Iran-backed proxy groups.
At the time of writing, the price of Brent was $80.58 per barrel, up 3.5%, while WTI prices were 3.6% higher at $77 per barrel.
The post One year into Israel-Hamas conflict: Oil prices fall 10%, but escalating tensions add risk premium appeared first on Invezz
https://invezz.com/news/2024/10/07/one-year-into-israel-hamas-conflict-oil-prices-fall-10-but-escalating-tensions-add-risk-premium/
