Energy market "forgets" the Israel-Hamas conflict, Europe is more worried, America unexpectedly benefits?

The Israel-Hamas conflict is taking place in the world's oil-rich region. However, so far, the energy market seems to have ignored the conflict and prices are falling slightly.

Oil prices fall despite the Israel-Hamas conflict showing no signs of abating. (Source: AP)

The Hamas attack and Israel’s subsequent declaration of war raised concerns about a wider regional conflict that could impact Middle East oil supplies. But those concerns have largely subsided among traders, who believe there is little risk of an escalation.

Brent crude, the international oil benchmark, is selling for around $80 a barrel, cheaper than when the Israel-Hamas conflict began.

Why is oil price down?

Why aren’t prices higher? Analysts say the main reason is that the conflict, no matter how intense, hasn’t caused much disruption to oil supplies. “The conflict is not an immediate threat to the energy market,” analysts say.

“While traders see increased risk, that has not led to a rush of hedging activity,” said Richard Bronze, head of geopolitics at Energy Aspects, a London-based market research firm.

Pessimism about future oil demand is pervading the energy market.

Per capita gasoline demand in the world's largest economy will fall to a 20-year low next year, with high gas prices and inflation likely to cause Americans to drive less on non-essential trips, according to a new US government report.

Adding to the pressure on oil prices was a slight recovery in the US dollar from recent lows, making oil more expensive for traders holding other currencies.

Traders are also worried about the outlook for the Chinese economy, the world's largest oil importer.

Crude oil imports from the world’s second-largest economy rose sharply in October, but China’s overall exports of goods and services fell at a faster-than-expected pace, adding to concerns about weakening global demand. China’s exports have fallen for a sixth straight month.

In addition, Saudi Arabia and Russia continue to voluntarily cut oil production until the end of 2024. Forecasters warn that 2024 could be a difficult year in the oil market.

These issues have caused oil prices to fall, despite the Israel-Hamas conflict showing no signs of abating.

Risks remain

Bjarne Schieldrop, a commodity analyst at SEB Bank (Sweden), said the market is watching for further action from Saudi Arabia and Russia if Brent oil prices fall below $80/barrel, which could put a strain on the budgets of both countries.

He predicted: “If oil prices fall below $80 per barrel, I think the two oil giants will intervene to create confidence in the price.”

Developments in the Middle East do not directly affect oil supplies, but experts have expressed concern about disruptions to exports from Iran and other countries in the region.

Four years ago, a missile attack on a key Saudi facility temporarily knocked out about half of the kingdom’s oil production. In a worst-case scenario, Iran, Hamas’s main backer, could try to block the Strait of Hormuz, through which a huge amount of oil flows to the rest of the world.

The global oil market is facing supply risks if the Hamas-Israel conflict spreads in the Middle East, and oil prices could rise slightly in the short term, said Giovanni Staunovo, an energy analyst at UBS Group AG.

Analysis by Rystad Energy (USA) also shows that the continued escalation or prolongation of the Israel-Hamas conflict will have major impacts on the regional gas market, despite Israel's surplus of this commodity.

“The biggest risk to Europe’s liquefied natural gas (LNG) supply is the stability of Egyptian gas exports as winter approaches,” Rystad Energy warned.

In addition, the disruption of Israel's three largest gas exploitation projects, Tamar, Leviathan and Karish, will also affect the Middle East market.

Israel's Tamar gas field was shut down after Hamas attacks earlier this month, Reuters reported. The gas field project meets more than 70 percent of Israel's domestic gas needs and is a major source of gas-fired electricity. About 5-8 percent of Tamar's gas production is exported.

The shortfall at Tamar has been partly offset by increased production at Leviathan, which accounts for 44% of Israel’s current gas production. But a prolonged shutdown of Tamar would reduce supplies to Israel and affect electricity exports to Egypt.

America benefits?

Regarding the US market, according to experts, the increase in oil prices will not have a significant impact on gas prices or consumer spending in this country. However, the Israel-Hamas conflict along with the Russia-Ukraine conflict will make the European Union (EU) more dependent on US gas in the long term.

US LNG exports are likely to continue to increase for at least two or three years.

The US is now the world’s largest LNG exporter, with October output reaching 7.92 million tonnes, according to data from the London Stock Exchange Group (LSEG). US LNG suppliers are directly benefiting from increased demand as the EU gradually weans itself off Russian gas.

As in 2022, the EU and the UK will remain the main destinations for US LNG exports in the first half of 2023, accounting for 67% of total US exports. Five countries – the Netherlands, the UK, France, Spain and Germany – imported more than half of all US LNG exports.

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