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| Israel-Hamas conflict: 'Strange developments' in the oil market, a big game between the US and Saudi Arabia? (Source: Getty) |
Conflict in the Middle East often means chaos in energy markets, as some countries in the region play a central role in global oil and gas production.
The attacks and retaliations between Israeli and Palestinian forces have pushed the entire region into a new era of great instability, both political and otherwise.
Energy market analysts are trying to understand the impact of this “hot spot” on global oil prices, which have been on a dramatic trajectory since 2020, following the Covid-19 pandemic and the Russia-Ukraine conflict with no end in sight.
Israel is only important for gas
As the world reacted to the events in Israel over the weekend, crude oil prices rose nearly 5% to $89 (€83) a barrel on the first day of the following week (October 9). Risk aversion and uncertainty around potential supply issues caused the immediate spike, but prices have generally held steady since then.
Although neither Israel nor Palestine are major suppliers in the oil market, the risk of conflict spreading in the Middle East - the world's top oil-producing region - has experts worried.
"If the current flashpoint becomes a broader conflict and causes oil prices to rise, it will certainly have a major impact on the global economy," said Gita Gopinath, a senior official at the International Monetary Fund (IMF).
US President Joe Biden has expressed concern about the possibility of the current Israel-Hamas conflict becoming more widespread, as evidenced by the recent attack on the Al-Ahli al-Arabi Hospital in Gaza that left hundreds of people dead.
The rise in oil prices appears to be gaining momentum as observers predict new Israeli military operations. Jordan’s King Abdullah II has warned that “the entire region is on the brink of the abyss” if the conflict between Israel and Hamas escalates and draws in other parties.
Back in the 1970s, the oil crisis sent prices soaring. It was the most dramatic oil crisis of the 20th century, following conflict in the Middle East. The 1973 Yom Kippur War saw several Arab states attack Israel (Yom Kippur is the name of the Jewish Day of Atonement).
The region's largest oil producers, led by Saudi Arabia, then imposed an oil embargo on pro-Israel countries such as the United States, Britain, Canada, Japan and the Netherlands, leading to an oil crisis that caused oil prices to rise more than 300%.
The second major oil crisis occurred in 1979 following the Islamic Revolution in Iran and the subsequent decline in oil production there. That crisis saw global oil supplies fall by about 4%, with the price of a barrel of crude more than doubling.
So far, there is little sign that what happened in Israel will trigger such a crisis. Prices are still well below the $97 a barrel they hit in late September, and warnings at the time that oil would soon top $100 a barrel now appear unlikely.
“Both WTI and Brent crude fell on October 10 as concerns about sudden and unexpected supply disruptions were brushed aside,” PVM Oil Associates analyst Tamas Varga told the media on October 11.
“The upward pressure on prices is largely due to ‘concerns’ about serious supply disruptions, but so far, no such scenario has materialized,” said Carole Nakhle, CEO of energy consultancy Crystol Energy.
However, the market remains concerned about the risk of the conflict worsening and spreading. Mr. Magid Shenouda, deputy CEO of Swiss commodities trading company Mercuria, said he was confident that prices could surpass $100 a barrel if the situation escalated.
Although Israel is not a major oil producer, it plays a major role in the global gas industry. Following Hamas attacks, it shut down the Tamar natural gas field, about 25 kilometers (15 miles) off its southern coast.
Israel exports large amounts of gas to neighboring Egypt and Jordan. The closure has raised concerns that the global gas market will become even tighter than it has been recently.
Egypt uses Israeli gas for some of its liquefied natural gas (LNG) exports, and the shutdown at Tamar could affect Egypt’s LNG exports to Europe and elsewhere. However, Israel’s largest gas field, Leviathan, continues to operate normally.
The uncertainty is how long the Tamar field will be shut down. Experts say a prolonged shutdown would significantly impact Israel’s exports to Egypt and Jordan, which would have a knock-on effect on the global LNG market. However, expert Carole Nakhle said she did not expect the Tamar shutdown to have a “significant impact” on oil prices.
“Political Game”
The Israeli crisis comes at a time when global energy markets are already strained, due to unrest over the military conflict in Ukraine. Combined with the consequences of the pandemic and other factors – it has contributed to a broader global energy crisis in 2021-23.
Oil prices have fallen from a peak of $115 reached in June 2022, despite production cuts from Saudi Arabia and its allies in the Organization of the Petroleum Exporting Countries (OPEC) since late September.
On October 4, days before the attack in Israel, OPEC confirmed that it would maintain production cuts until the end of 2023. But even after that news, prices continued their downward trend since late September.
Production cuts by Saudi Arabia, other OPEC members and Russia mean there is spare capacity that should not be a concern in the event of a sudden supply cut. However, it remains uncertain how Riyadh will respond to recent tensions with the US.
Observers say the biggest concern is that disruptions from the Israel-Hamas conflict will further politicize the oil market.
Iran’s role is also being closely watched. While Washington has long imposed sanctions on Iranian oil sales, significant volumes have recently flowed to China and elsewhere, cooling oil markets after restrictions on Russian oil.
“There is a big geopolitical game going on here,” experts say.
Saudi Arabia is playing a “big game”. While negotiating a Middle East peace deal with Israel and the United States, Saudi Arabia has rejected Washington’s efforts to keep gasoline and natural gas prices low. This is fundamentally in line with Russia’s interests. Saudi Arabia has also opened channels of negotiation with China.
On the other hand, Washington is turning a blind eye to the oil trade between Iran and China. The reason is that the more oil China buys from Iran, the less pressure it puts on the global oil market, which is being restricted by Saudi Arabia and Russia. This is how the US maintains a stable market.
Experts fear that the "fragile situation" could be broken if Israel or the US adopt a strong strategy against Iran, amid the current escalation of the Israel-Hamas conflict.
If that scenario plays out, the Strait of Hormuz, through which 17 million barrels of oil pass every day, could close. The ghost of the eight-year “tanker war” between Iraq and Iran in the 1980s could return.
There is also speculation that gas-rich countries like Qatar could cut off exports in protest at Israel’s military action. “The rumors about Qatar remain just that, rumors,” Nakhle said. “Of course, exporting natural gas gives a country like Qatar significant political leverage, but the emirate recognizes how deliberately cutting off supplies could damage its reputation as a reliable supplier, something Qatar has worked hard to protect.”
The crisis has not yet spread to global energy markets, but the risk of escalation has put markets on alert. Some say that counterweights like the US and Saudi Arabia could help stabilize oil prices, albeit not quickly.
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