Oil prices soar as Hamas’ attack on Israel fans Middle East tensions
By Serene Cheong
Oil jumped more than 4 percent after surprise attacks by Hamas on Israel over the weekend, the largest and bloodiest in decades, threatened to inflame tensions in the Middle East, home to nearly a third of the world’s supply.
West Texas Intermediate rose above $86 a barrel as the war risk premium returned to markets. The death toll passed 1,100 as the fighting entered a third day, while the US said it was sending warships to the region.
Recent developments in Israel do not pose an immediate threat to oil supplies, but there is a risk that the conflict could escalate into a more devastating proxy war involving the US and Iran. Any possible retaliation against Tehran amid reports that the Islamic Republic was involved in the attacks could jeopardize the passage of ships through the Strait of Hormuz, a vital channel that Iran has previously threatened to close.
“Key for markets is whether the conflict remains contained or spreads to include other regions, particularly Saudi Arabia,” analysts at ANZ Group Holdings Ltd said in a note. Brian Martin and Daniel Hines. “At least initially, it appears that markets will accept that the situation will remain limited in scope, duration and implications for oil prices.” But higher volatility can be expected.”
WTI futures and global benchmark Brent have tumbled this month – down about $10 a barrel before the attack on Israel – as worries about high interest rates and slowing growth clouded the outlook for demand. Those fears overshadowed the optimism that fueled a sharp rally in the third quarter as physical balance sheets tightened due to prolonged Saudi-led crude output cuts.
The focus will be on the wider fallout between Washington and Tehran after months of thawing relations, a rare prisoner swap and the release of billions of dollars in frozen funds. Although crude supplies from Iran have rebounded to a five-year high with America’s tacit blessing, military action over the weekend could prompt the Biden administration to crack down more aggressively on those flows, potentially curbing supplies and sending prices higher.
In an extreme scenario, Iran could retaliate and target the Strait of Hormuz if the Islamic regime is cornered. The waterway is essential for the movement of nearly 17 million barrels of crude oil and condensate each day, through which major oil producers and OPEC members such as Saudi Arabia, Iraq and the United Arab Emirates export crude oil.
“If Israel comes out and engages Iran directly, 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 expect that critics in Congress and elsewhere will argue that the White House is providing Iran with the financial means to sponsor such malign actors.”