‘Knee-jerk’ reaction eases but could the Israel-Palestine war drive oil to $150 per barrel?

On early Saturday morning, 07^th October 2023, pictures of the carnage that had engulfed the streets of Israel were broadcast around the world.

A sudden and massive attack had meant the loss of at least 700 lives.

In addition, reports suggest that approximately 400 Palestinians fell to Israeli airstrikes.

CNN reports that the scale of the violence was unprecedented with anywhere between 2,200 to 5,000 rockets being fired into Israel, depending on the source.

NDTV, an Indian news network noted that the missile attacks took place within 20 minutes.

Air raid sirens rang out as Israel’s state-of-the-art air defence system, the Iron Dome, which has been in active service since 2011, was reportedly overwhelmed by the sheer scale of the assault.

This was despite system upgrades as recently as 2021.

The expected surge in oil prices

Amid falling global demand, WTI and Brent prices declined approximately 8% and 11%, respectively over the course of the past week, marking the largest weekly drop since March 2023.

However, global crude prices are highly susceptible to geopolitical tensions, particularly those in the Middle East, which sparked a strong rally earlier in the session.

This is even though Israel has limited oil production and refining capacity, while primary energy data released by the US Energy Information Administration for Palestine in 2021, noted that the West Bank and Gaza Strip produce no coal, dry natural gas, petroleum, or other hydrocarbon-based liquids.

The WTI which closed at $85.19 quickly soared to a high of $87.24.

At the time of writing, this eased somewhat to $85.81.

Brent crude, on the other hand, opened at $87.36, before rising to $89.0.

As with the WTI, prices have eased but are already trading below the market open at $87.29.

Vandana Hari, CEO of Vanda Insights, had anticipated the possibility of such a situation and noted,

We may see a knee-jerk surge in crude prices on Monday…

The sudden jump in price appears to have been for a limited period, and may fizzle out once the market is certain that the onset of large-scale hostilities will be localized and temporary.

However, she added that if the violence persists, this could result in significant volatility for the oil markets and drive higher prices in the long run.

Geopolitical equations

The United States has been in the process of attempting to broker a peace agreement between Saudi Arabia and Israel in a bid to resume harmonious relations.

Discussions with Saudi Arabia are crucial to the Biden administration that has been trying to convince the Kingdom to increase their oil output and ease global energy tightness.

However, with little clarity as to how this new cycle of violence will eventually play out between Israel and Palestine, these efforts as well as broader regional stability could be potentially undone.

Iran

Perhaps, even more than Saudi Arabia, Israel, or Palestine, financial market participants are focused on the implications for Iran, a key OPEC member.

Over the past year, a portion of the declines in global oil prices have been driven by the re-integration of partial Iranian supplies (estimated to the tune of half a million barrels a day) in the global marketplace, as well as de-escalating tensions in the region.

Commodities veteran and hedge fund owner Pierre Andurand noted that since Iran is viewed unfavourably in the United States as a supporter of the attacks on Israel, President Biden may re-engage sanctions on the country, tightening the oil market even further in the longer run.

A report by The Wall Street Journal placed the blame squarely on Iran, noting,

Iran Helped Plot Attack on Israel Over Several Weeks…The Islamic Revolutionary Guard Corps gave the final go-ahead last Monday in Beirut.

Speaking to Reuters, energy expert Saul Kavonic noted that if US-led sanctions are imposed on the country,

(in such a case)…up to 3% of global oil supply is at risk.

The conflict comes at a time when OPEC+ countries have already agreed to substantial voluntary production cuts till the end of 2023.

Final words

Although oil prices have moderated somewhat since their peak earlier today, Israel Prime Minister Benjamin Netanyahu warned citizens to expect,

…a long and difficult war…

As a result, any sustained de-escalation may be potentially out off reach in the near-term.

Although the short-run implications of the Israel-Palestine war on the oil price may be transient, Andurand believes that if the Middle East as a whole is engulfed in a wider conflict, the effects could be profound.

He noted,

…one should not expect a large oil price spike in the coming days…The market will eventually have to beg for more Saudi supply, which I believe, will not happen sub $110 Brent… Also, the probability that this (potential for future US-led sanctions) will lead to direct conflict with Iran is not zero.

In line with Andurand’s concerns, Kavonic added that the situation could become even more unpredictable if brewing regional instability impacts access to the Strait of Hormuz, the gateway between the Persian Gulf and the Gulf of Oman,

…around 20% of global oil supply could be held hostage.

Marko Papic, the chief strategist at Clocktower Group argued that historical geopolitical disturbances in the Levant have in the past had temporary impacts on global oil prices since any fallout tends to be localized.

However, not all commentators are optimistic about eventually keeping oil prices in check.

For instance, Dan Alamariu, chief global strategist at Alpine Macro believes that a break out could be on the cards, and attributes a 20% probability of oil prices surging to as high as $150 per barrel due to the tensions in the Middle East.

Whatever the outcome, the US-Iran relationship is likely to play a leading role in deciding the trajectory of energy markets in the coming months.