Brent crude, the global benchmark, rose 4.53% to $88.41 a barrel while West Texas Intermediate, the U.S. marker, gained 4.69% to $88.67. The sharp gains came after Palestinian militant group Hamas launched a surprise multi-front attack on Israel Saturday morning, with armed fighters infiltrating Israel by land, sea and air.
The brazen assault came just hours after Hamas fired thousands of rockets into Israel from Gaza. As of Monday, at least 700 Israelis have been killed in the fighting, NBC News reported. Meanwhile, Gaza’s Health Ministry has recorded 313 Palestinian deaths.
Analysts say oil’s price surge is likely a knee-jerk reaction to the violence that could prove temporary unless the conflict significantly disrupts regional crude supplies for a sustained period.
“For this conflict to have a lasting and meaningful impact on oil markets, there must be a sustained reduction in oil supply or transport,” said Vivek Dhar, Commonwealth Bank’s director of mining and energy commodities research, in a note. “Otherwise, and as history has shown, the positive oil price reaction tends to be temporary and easily trumped by other market forces.”
Neither Israel nor the Palestinian territories are major oil producers. Israel has two refineries with a combined capacity of almost 300,000 barrels per day but minimal crude output, according to the U.S. Energy Information Administration. The Palestinian territories produce no oil at all.
However, the clash brings conflict to the doorstep of the critical producing Middle East region, which supplies about one-third of the world’s oil. The key concern is the potential for escalation that could eventually threaten exports, especially from Iran.
“If western countries officially link Iranian intelligence to the Hamas attack, then Iran’s oil supply and exports face imminent downside risks,” said Dhar.
Iran’s crude exports have been constrained since 2018 when former President Donald Trump withdrew from Tehran’s nuclear deal with world powers and reimposed sanctions. But with tacit U.S. approval, Iran has managed to boost oil exports this year to around 3.2 million barrels per day through covert shipments to China and other buyers.
Any renewed restrictions on Iranian crude as punishment for the Hamas attack could lead to a supply shortfall on global markets. Iran ships most of its oil through the narrow Strait of Hormuz, which handles about one-fifth of the world’s oil trade.
“There’s also a risk of the conflict escalating regionally. If Iran is sucked into it, there could also be supply issues, though we’re not at that stage yet,” said Henning Gloystein, Eurasia Group’s director of energy, climate and resources, in an email.
On Sunday, the leader of Lebanon-based Hezbollah said the militant Shiite group had launched attacks on Israeli military sites in disputed border territory. Analysts warn the Israel-Hezbollah frontier in southern Lebanon remains a potential flashpoint.
“The way this becomes an authentic problem for the oil market, and contributes to a much bigger spike is if the market believed the fighting would spread to Hezbollah in Lebanon,” said Bob McNally, president of Rapidan Energy Group.
McNally said crude prices could move “much higher” if Hezbollah becomes involved. Even a conflict solely between Israel and Iran could easily tack on $5 to $10 per barrel to oil prices given the proximity to the crucial Strait of Hormuz transit chokepoint, he added.
Josh Young, chief investment officer at energy investor Bison Interests, also sees an Iran factor adding about $5 per barrel to the oil price. “If western countries officially link Iranian intelligence to the Hamas attack, then Iran’s oil supply and exports face imminent downside risks,” he said.
For now, the U.S. is monitoring but not directly involved in the clash. Secretary of State Antony Blinken on Sunday noted the “limited firing” between Hezbollah and Israel but said tensions there have eased. “As of now, that’s quiet, but it’s something we’re watching very carefully,” Blinken told CNN.
Unless the violence spreads and puts oil infrastructure at direct risk, most analysts expect the supply impact to remain limited. “As long as the Suez Canal and major oil pipelines like East-West remain unaffected, the upward pressure on crude benchmarks should start to fade,” Dhar said.
Concerns about economic fallout from China’s COVID-19 lockdowns and looming interest rate hikes by the Federal Reserve are larger influences keeping a lid on oil prices, analysts say.
“The Fed and China’s economy are substantially more important drivers of oil prices than geopolitical issues,” said McNally.
Still, with Brent crude gaining nearly 60% over the past year largely due to Russia’s war on Ukraine, the market remains on edge about potential new supply threats. For now, analysts say the Israel-Hamas conflict is likely just another short-term spike factor.
Want to know more about how geopolitics influence energy markets? Check out our in-depth coverage on how the Russia-Ukraine war continues impacting oil prices and what it could mean for your wallet at the gas pump this summer. You can also learn about how sanctions have devastated Russia’s once mighty energy industry and turned global oil flows upside down. Stay up to date on the latest commodity market news by subscribing to our daily newsletter