How the Escalating Israel-Palestine Conflict Impacts the Global Energy Market
Since the sudden escalation of the conflict between Palestine and Israel last weekend, its effects on the energy market have become evident.
On Monday, prices for oil and natural gas surged. Brent crude oil futures, the global benchmark, rose by 4% at one point, reaching $88 per barrel. Meanwhile, U.S. crude oil futures saw an increase of 5.4%, settling above $86 per barrel. European natural gas futures prices jumped by 14%, exceeding 43 euros per megawatt-hour.
Industry experts suggest that, given neither Israel nor the Gaza region produce significant amounts of oil, the overall impact on energy prices might be limited as long as no third parties from within or outside the region get involved.
Société Générale of France anticipates that this escalation could lead to a rise in crude oil prices by $5-10. Morgan Stanley believes the conflict's impact is limited, predicting it won't spread to other countries, implying minimal long-term effects on oil prices.
Homayoun Falakshahi, a senior oil analyst at data service provider Kpler, stated that the attack itself hasn't directly impacted the oil market. "So far, the effect on supply and demand is almost zero," he said, but cautious investors are factoring in geopolitical risks.
While the conflict zone isn't a major oil-producing area, the Middle East accounts for nearly one-third of global supply. Observers are concerned that the conflict might spread to nearby oil-producing countries. The most significant risk to oil prices is how tensions between Israel and its arch-enemy, Iran, evolve.
Potential Consequences of Iran's Involvement
Iran is the pivotal factor. Its direct involvement and the subsequent chain reactions it might trigger pose significant risks to the energy market.
The extent of Iran's involvement remains unclear. At the onset of the conflict, an advisor to Iran's Supreme Leader Ayatollah Khamenei praised Hamas's actions. Later, a Hamas spokesperson openly acknowledged receiving "direct support" from Iran during an interview.
However, this claim was subsequently denied by Iranian officials. At a United Nations Security Council meeting last Sunday, Iran denied involvement in the attacks, but President Raisi expressed support and offered assistance if needed. On Monday, Iran's representative to the UN once again denied involvement. On Tuesday, Khamenei refuted claims of non-Palestinian involvement in the attacks.
The U.S. response is also crucial. If the international community determines that Iran was involved, it could lead to stricter U.S. oil sanctions against the country.
The U.S. has been easing its enforcement of sanctions against Iran. In this context, Iran has become a significant source of additional oil this year. Data from the Belgian think tank Bruegel indicates that Iran's daily oil production surged by 700,000 barrels this year. Even so, Iran's impact on the global oil market remains limited. According to Kpler, Iran's crude oil exports in the third quarter of this year were around 1.4 million barrels per day, accounting for a maximum of 1.4% of global supply.
In recent months, the U.S. has softened its stance on Iran, turning a blind eye to its oil sanctions. Caroline Bain, Chief Commodities Economist at Capital Economics, believes that since the escalation of the Israel-Palestine conflict, it will be harder for the U.S. to maintain this lenient policy.
Other measures the U.S. could adopt include closely monitoring tankers suspected of transporting Iranian oil to global markets. Simone Tagliapietra, a senior researcher at Bruegel, suggests the U.S. could also take actions like tightening insurance services provided to tankers.
Falakshahi from Kpler noted that trading companies dealing in Iranian oil are mostly located in Hong Kong, mainland China, Oman, and the UAE, and the U.S. might target them.
The U.S.'s recent statements are also intriguing. On Monday, U.S. Deputy National Security Advisor Finer reiterated that while they believe Iran was "broadly involved" in Hamas's attacks on Israel, they currently lack "direct information" linking Iran to this unprecedented attack.
Concerns Over Israel's Retaliatory Actions
Additionally, Israel's potential retaliatory actions could have consequences. With Hamas achieving its initial objectives through preemptive actions, there's speculation that Israel might be preparing for a large-scale retaliatory operation. On Monday, Israel advised its citizens to be prepared to stay in shelters for up to 72 hours, seemingly clearing the way for a significant operation.
For a long time, Israel has accused Iran of engaging in a form of proxy war by supporting groups like Hamas. Ed Morse, Global Head of Commodity Research at Citibank, indicated that the risk of Israel attacking Iran is increasing. Analysts from the Royal Bank of Canada Capital Markets also believe that Israel might escalate actions against Iran, but Tehran's potential response remains unclear.
For the oil market, a less likely but more severe risk is the conflict spreading to the Strait of Hormuz.
The Strait of Hormuz, a narrow waterway near Iran's southern border, sees 37% of the world's seaborne oil shipments pass through. The Iranian government has threatened to close the strait multiple times. Any retaliatory action against Tehran could jeopardize the passage of vessels through the Strait of Hormuz.
Falakshahi believes that such an event would "completely change the rules of the oil market game," with price increases not being 2%, but 20%. However, he also noted that while this risk exists, it remains distant.
Tobias Borck, a senior researcher at the Royal United Services Institute (RUSI), thinks it's too early to speculate on the above conclusions. The current Israel-Palestine conflict would need to expand "far beyond Israel's geographical area" to provoke Iran or its affiliated organizations into such actions.
Another risk not to be overlooked comes from Israel's northern neighbor. Western analysts point out that Hezbollah in Lebanon directly joining the Israel-Palestine conflict could be the next flashpoint, potentially dragging regional powers like Iran and Saudi Arabia into the fray.
Hezbollah, considered a quasi-military organization supported by Iran, is far better armed than Hamas. On Sunday, three locations in the Shebaa Farms, a disputed territory between Lebanon and Israel, were shelled, with Hezbollah claiming responsibility. Israel retaliated.
In interviews with Interface News, several experts believe that the current skirmishes between Hezbollah and Israel are symbolic. They don't rule out the possibility of Hezbollah getting involved in the conflict, but evolving into another Middle East war seems unlikely.
Furthermore, this conflict could potentially hinder the chances of improved relations between Israel and Saudi Arabia, the world's second-largest oil producer. Before the outbreak of the conflict, U.S.-facilitated reconciliation efforts between Saudi Arabia and Israel seemed to be in the final stages. Reports suggest that the terms of the agreement reached between the two sides included Saudi Arabia's commitment to reduce or cancel its daily oil production cut of 1 million barrels.
This escalation in the Israel-Palestine conflict comes at a time when international oil prices are on a roller coaster. At the end of September, due to production cuts by Saudi Arabia and Russia leading to a tightened market, Brent crude oil prices were expected to rise to $100 per barrel. However, they saw a significant drop last Friday, marking the largest weekly decline since March, due to concerns over consumption and capital flows.
