Global oil prices have surged due to concerns that the recent escalation of tensions between Israel and Gaza could disrupt oil production in the Middle East.
Early on Monday, international benchmark Brent crude futures increased nearly 5%, eventually settling at $87.20 per barrel. This surge is over 3.1% rise from Friday’s closing prices. In parallel, domestic West Texas Intermediate (WTI) futures followed suit, surging past $86 per barrel before settling at $85.70, a 3.5% increase compared to Friday’s trading.
While neither Israel nor Palestinian territories are major oil producers, the Middle East is responsible for nearly one-third of the world’s oil supply. The escalation in violence, marked by Hamas’s attack on Israel, represents the most substantial conflict between the two sides in decades.
Iran, although not directly implicated in the attack, has faced accusations of supporting Hamas. Iranian President Ebrahim Raisi expressed support for the assault but denied Iran’s involvement during a UN Security Council meeting in New York, according to Reuters.
Saul Kavonic, an Energy analyst, emphasised that the rise in crude oil prices is primarily driven by concerns over a potentially broader conflict that could extend to major oil-producing nations like Iran and Saudi Arabia, BBC reported. Kavonic said, “If the conflict engulfs Iran, which has been accused of supporting the Hamas attacks, up to 3% of global oil supply is at risk.”
Kavonic also highlighted the vulnerability of a significant portion of global oil supply if there are disruptions in the Strait of Hormuz, a critical oil trading route. Approximately one-fifth of the world’s oil supply could be affected if passage through the strait is interrupted.
The Strait of Hormuz holds immense importance for Gulf region oil exporters, whose economies are heavily reliant on oil and gas production. The ongoing uncertainty regarding the situation could drive investments into U.S. Treasury bonds and the dollar, assets traditionally sought by investors during times of crisis, explained James Cheo from HSBC bank.
Similarly, Caroline Bain, Chief Commodities Economist at Capital Economics, noted that Iran had been increasing oil production throughout the year despite U.S. sanctions. She suggested that the U.S. had been somewhat tolerant of this growth, a trend that might be challenging to ignore going forward. “Capital Economics anticipates that demand for oil will surpass supply in the final quarter of the year, further supporting higher oil prices,” she told BBC.
This recent surge in oil prices is reminiscent of the price spikes observed after Russia’s invasion of Ukraine in February 2022, when oil prices surpassed $120 per barrel in June of the same year.
Although prices temporarily dipped to just above $70 per barrel in May of this year, they have been steadily climbing as oil producers have implemented production cuts to bolster the market.
