‘Knee-jerk surge’: Oil experts predict market impact of Israel-Hamas conflict

Oil has surged as much as 5 per cent 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 crude.

West Texas intermediate traded near $US86 a barrel on Monday as a war-risk premium returned to markets.

The death toll on both sides following Hamas’ strikes against Israel over the weekend topped 1100 as fighting headed into a third day, while the US said it was sending warships to the region.

The latest events in Israel don’t pose an immediate threat to oil flows, but there’s a risk the conflict could spiral into a more devastating proxy war, embroiling the US and Iran. Any retaliation against Tehran amid reports it was involved in the attacks could endanger the passage of vessels through the Strait of Hormuz, a vital conduit that Iran has previously threatened to close.

“While the worst-case scenario of a regional war has to be kept in view, it’s not my base case,” said Vandana Hari, founder of Singapore-based analysis firm Vanda Insights. “Restraint and calmer minds will prevail as there will be only losers all-round in a wider war.”

WTI and global benchmark Brent futures had plummeted this month — dropping by around $US10 a barrel before the attack on Israel — as worries about high interest rates and slowing growth clouded the demand outlook. Those fears overshadowed bullishness that spurred a sharp rally in the third quarter as physical balances tightened due to prolonged Saudi-led crude output cuts.

The Israel-Hamas war reduces expectations Saudi Arabia will cut or eliminate its one million-barrels-a-day of output curbs, Citigroup analysts Ed Morse and Eric Lee said in a note. Risks are also growing that Israel will attack Iran, they said.

The attacks come after months of easing tension between Washington and Tehran, with crude shipments from Iran rebounding to a five-year high with America’s tacit blessing. In an extreme scenario, Iran could retaliate and take aim at the Strait of Hormuz, should the Islamic regime find itself in a corner. The waterway is essential for the movement of nearly 17 million barrels of crude and condensate each day.

“If Israel comes out and directly implicates Iran, we believe it will likely be difficult for the Biden administration to continue to adopt such a permissive sanctions regime,” RBC Capital Markets analyst including Helima Croft said in a note. “We anticipate that critics in Congress and elsewhere will contend that the White House is providing Iran with the financial wherewithal to sponsor such malign actors.”

The weekend’s events were reflected in oil’s futures curve, although the moves weren’t dramatic. WTI’s prompt timespread moved to $US1.72 a barrel in backwardation, a bullish market structure that signals nervousness over supply, from $US1.51 on Friday.

“The lack of movement in WTI timespreads suggests there’s little change in supply-demand fundamentals at the moment,” said Warren Patterson, head of commodities strategy at ING. “Although, uncertainty over how the situation evolves is likely to support prices.”

Oil experts predict market impact of Israel-Hamas conflict

Crude oil prices could see a spike on Monday but the overall impact of the attack on Israel by Palestinian militants Hamas will likely be limited, energy experts have told CNBC.

That’s provided the conflict does not escalate further, they said.

“We may see a knee-jerk surge in crude prices when markets open on Monday,” Vandana Hari, CEO of Vanda Insights, told CNBC.

“There will be some risk premium factored in as a default, until the market is satisfied that the event is not setting off a chain reaction and Mideast oil and gas supplies won’t be affected,” said Hari.

Militants from Hamas — designated by the US, European Union and the UK as a terrorist organisation — infiltrated Israel by land, sea and air on Saturday, during a major Jewish holiday. The incursion came hours after the Islamist militants fired thousands of rockets into Israel from Gaza.

Civilians including women, children and the elderly have been abducted, and others killed in their homes, Israeli Prime Minister Benjamin Netanyahu said.

The impact on the oil price will be limited unless we see the ‘war’ between the two sides expand quickly to a regional war.

Israel has begun the offensive phase, and will “continue with neither limitations nor respite until the objectives are achieved”, Netanyahu said.

He vowed to “exact an immense price from the enemy, within the Gaza Strip as well.” Late Saturday, Israel cut off the supply of electricity, fuel and goods to the narrow strip where 2.3 million Palestinians live.

At the time of publication, there were at least 250 Israelis killed and more than 1860 injured, including 320 in serious condition, NBC News reported. The Palestinian Healthy Ministry recorded 256 deaths and 1790 injuries in Gaza.

How much oil is involved?

Both Israel and Palestine are not major oil players, but the conflict sits in a wider key oil producing region, analysts told CNBC, warning that it has the potential to conflagrate further.

Hari noted that while the conflict does not directly impact oil production or supply, it is still “on the doorstep of an important oil-producing and exporting region”.

Israel boasts two oil refineries with a combined capacity of almost 300,000 barrels per day. According to the US Energy Information Administration, the country has “virtually no crude oil and condensate production”. The Palestinian territories produce no oil, data from EIA shows.

It has the potential to widen into regional hostilities.

Hari’s sentiments were echoed by other market watchers.

“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.

Similarly, French businessman and hedge fund manager Pierre Andurand said that since the Levant is not a large oil producing region, the war is unlikely to impact oil supply in the short term.

“One should not expect a large oil price spike in the coming days. But it could eventually have an impact on supply and prices,” he said in a post on X, the social media platform that was formerly Twitter.

Andurand said global oil inventories are low, and production cuts by OPEC kingpin Saudi Arabia, as well as Russia, will lead to more inventory draws over the next few months.

“The market will eventually have to beg for more Saudi supply, which I believe, will not happen sub $US110 Brent.”

Crude oil prices recently hit their highest level in more than a year before pulling back.

Still, Hari warned that the ongoing Israeli-Palestinian conflict “has the potential to widen into regional hostilities.”

On Sunday, Lebanon’s Hezbollah militant group confirmed it launched attacks on three sites in the Shebaa Farms — a strip of land that sits at the intersection of the Lebanese-Syrian border and the Golan Heights, which is occupied by Israel.

The Israeli Defense Force confirmed it has returned fire and “struck Hezbollah terrorist infrastructure.”

CNBC, with Bloomberg