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Oil and gas stocks rallied in premarket trading on Monday morning as crude oil prices spiked over 3% following an attack on Israel by Palestinian militant group Hamas over the weekend. The broad energy sector, as represented by the Energy Select Sector SPDR ETF (XLE), jumped 2.2% higher, with all components that traded early Monday in positive territory.

Leading the Dow Jones Industrial Average’s gainers was Chevron Corp. (CVX), whose share price climbed 2.4% higher. Other top energy stocks on the move included Occidental Petroleum Corp. (OXY), up 3.2%, Exxon Mobil Corp. (XOM), up 2.8%, and Schlumberger Ltd. (SLB) as well as Devon Energy Corp. (DVN), both up 3.2%.

The rally in oil and gas stocks comes as crude oil futures surged 3.4% to over $85 a barrel, hitting a one-week high. This price spike comes on the heels of a steep sell-off in crude over the past week, with oil dropping 11.6% since closing at a 13-month peak of $93.68 on September 27.

The rise in crude prices on Monday was driven by increased geopolitical tensions and supply concerns following a series of rocket attacks launched by Hamas into Israel over the weekend. On Sunday, Hamas fired rockets towards Jerusalem and southern Israel, with one rocket strike killing two people in Ashkelon. This marks the worst attack on Israel since last year’s 11-day conflict when over 250 Palestinians and 13 Israelis were killed.

In response to the rocket barrage, the Israeli military carried out a series of strikes against Hamas targets in Gaza, reportedly killing 11 militants. Health officials in Gaza said at least 20 people in total were killed. The exchange of fire between Israel and Hamas raises worries over a potential larger conflict, which could threaten crude supplies from the energy-rich region.

Kurt Hallead, co-head of global energy research at RBC Capital Markets, said in an interview with MarketWatch that he does not believe the violence between Israel and Hamas will derail any agreements between the U.S. and Saudi Arabia over oil supply and prices.

Hallead expects the Saudis will continue enabling a “soft landing for oil” with prices stabilizing in the $70 to $90 per barrel range, despite the geopolitical tensions. Saudi Arabia and OPEC+ have already cut oil production substantially this year to keep prices from dropping too low.

How the Israel-Hamas Conflict Impacts Oil Markets

The flare-up between Israel and Hamas comes at a time when oil prices had already pulled back substantially after reaching multi-year highs earlier in 2022. Brent crude, the international oil benchmark, hit over $128 a barrel in March in the aftermath of Russia’s invasion of Ukraine.

However, prices had fallen back below $90 in recent weeks as economic growth slows globally, crimping oil demand. Investors were also betting that a deal between Western countries and Iran to revive the 2015 nuclear agreement could lead to more Iranian oil exports.

The new Israel-Hamas tensions inject more uncertainty into oil markets, especially when combined with the ongoing Russia-Ukraine war. The potential for expanded conflict threatens crude supplies from the Middle East.

So far, the unrest has not impacted operations at key regional oil facilities. But prolonged fighting could force shutdowns or supply reductions, exerting upward pressure on prices.

Israel is not a major oil producer itself. However, heightened Israel-Hamas hostilities, especially if expanded to groups like Hezbollah, risks spillover effects on neighboring oil powers. A full-blown war could potentially threaten maritime transit through strategic oil shipping routes.

About 6 million barrels per day of crude passed through major Mideast chokepoints like the Suez Canal and the Strait of Hormuz last year, according to the EIA. Disruptions to these key transit points could rattle oil markets and cause prices to spike.

Brent Oil Prices 2022 Year-to-Date

After hitting 14-year highs above $128 in March, Brent crude prices had fallen back below $90 on concerns over weakening global demand. But geopolitical risks from the Israel-Hamas violence provide renewed support.

Impact on Natural Gas Markets

The conflict has already led to a surge in natural gas prices, as Israel is a key importer of liquefied natural gas (LNG).

Natural gas futures jumped as much as 6% on Monday, as the fight between Israel and Gaza stoked worries over potential disruptions to pipeline gas supplies from Egypt.

Israel relies on Egypt for over 40% of its natural gas through the subsea Arish-Ashkelon Pipeline. But rocket fire during intense clashes often force pipeline shutdowns as a precaution.

More significantly, escalated Israel-Hamas hostilities could threaten Israel’s LNG imports. In 2021, Israel imported record amounts of LNG, which now makes up around 25% of the country’s gas supply.

Most of Israel’s LNG comes from Qatar, the world’s top LNG exporter. If the conflict expands, shipments from Qatar could face risks, necessitating supply rationing in Israel.

During the 2021 war, Hamas rocket fire forced temporary closures of a key LNG terminal in Ashdod. LNG prices surged globally when the Ashdod terminal shut down last May. Renewed terminal closures could drive up LNG prices worldwide.

Kurt Hallead Maintains Oil Price Forecast Despite Geopolitical Tensions

While the increase in violence between Israel and Hamas adds more uncertainty on top of an already volatile crude market, analyst Kurt Hallead reiterated to MarketWatch that he expects prices will remain rangebound.

“I don’t think it’s going to derail any slow progress that’s been developing on the negotiations between the administration and the Saudis,” Hallead said about the impact of the conflict.

Hallead, Co-Head of Global Energy Research at RBC Capital Markets, predicts that Saudi Arabia will continue enabling a “soft landing” for oil. In his view, crude prices stabilizing between $70 — $90 per barrel seems reasonable despite renewed geopolitical risks.

The Saudis and OPEC+ already engineered substantial output reductions totaling 2 million barrels per day in October to keep oil from plunging into a new downturn. OPEC, led by Saudi Arabia, appears committed to defending prices through supply management.

Hallead believes the strategic partnership between Riyadh and Washington will remain intact. The two nations have grown closer in recent months, with President Biden visiting Saudi Arabia in July to mend relations and ask for more oil.

Though Hallead’s forecast bodes well for oil price stability, much depends on whether the violence between Israel and Hamas escalates into a repeat of last year’s war. A severe disruption could force even Saudi Arabia and OPEC+ into action to quell market turmoil.

Investors are advised to watch the situation in Israel closely as it develops. Though current tensions may remain contained, a prolonged conflict would heighten the risk premium already embedded into crude prices from the Ukraine war.

Conclusion:

The sudden increase in violence between Israel and Hamas, including rocket attacks and retaliatory airstrikes, sent crude oil prices sharply higher on Monday as concerns grew over potential impacts on regional energy supplies. Major oil companies like Chevron and Exxon mobil saw shares surge in premarket trading. While one analyst sees the unrest as unlikely to derail forecasted stability in oil markets, investors should closely monitor the conflict as it has the potential to drive prices higher if expanded. A full-blown war could threaten Mideast oil transit chokepoints and disruptions to Israeli energy imports. Regardless, the latest clash adds another layer of geopolitical uncertainty on top of already high volatility in oil and gas markets.

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