Oil futures surged in early trading on Monday (October 9, 2023) following supply disruption fears in the wake of the tragic situation in Israel and Gaza, after an attack by militant group Hamas on southern Israel on Saturday marked the biggest escalation in conflict for nearly five decades.
At 01:28 EDT, Brent front-month oil futures contract – regarded as a global proxy benchmark – was up $2.75 or 3.25% to $87.33 per barrel, having risen by 4% at one point in Asian trading to $89. Concurrently, the West Texas Intermediate (WTI) was trading at $85.80 per barrel up $3.01 or 3.64% intraday.
While neither Israel nor Gaza are major producers, here are the scenarios in which stability in the wider Middle East – a region responsible for producing a third of the world’s crude oil – may be upended and likely lead to a profound impact on the global market.
Scenario 1: In what could be a major black swan event, Israel may conclude that Iran – which supports Hamas – is behind the attack, and retaliate directly against Tehran alongside its ongoing reactive attacks on Gaza. This supposition may be based on historic links between Hamas and Israel, scale and sophistication of Saturday’s attack itself, and / or intelligence reports. To make matters worse, while Iran claims it has no involvement, Hamas has openly thanked Tehran for its support. Should the conflict embroil Iran, the development not only has the potential for its production facilities to be hit but that of wider blockages in the Strait of Hormuz, a key maritime artery for crude supplies. Saudi Arabia, Iraq and to an extent United Arab Emirates’ crude, as well as Qatar’s Liquified Natural Gas (LNG) cargoes pass through the Strait daily. Additionally, Iranian crude exports have accounted for 2.5% to 3.1% of the global market in recent years.
Scenario 2: Israel ups the tempo of its ongoing retaliation for the attacks to a full scale ground invasion of Gaza to wipe out Hamas. Such a move, which is highly likely, will draw in militant proxies from around the Middle East, and Lebanon’s Hezbollah to the North of Israel marking a de facto prolonged war on two fronts for Israel. That will likely pull in international involvement and condemnation. It could also upend progress made under the Abraham Accords initiated during Donald Trump’s presidency aimed at normalizing relations between Israel and the wider Middle East. The accords have thus far led to Bahrain and United Arab Emirates establishing diplomatic ties and trade links with Israel, while progress had been made to normalize relations with Saudi Arabia as well. Many believe Hamas’ attack to be a targeted disruption of progress made by the Saudis and Israelis.
Scenario 3: While as yet looking unlikely, what could well be another major upheaval is the direct involvement of the U.S. In response to the attack, Washington has pledged its unequivocal support for Israel. It has dispatched a navy carrier strike group to the region along with munition supplies to Israel. If the U.S. is pulled into the conflict, all ‘crude’ bets may be off.
Scenario 4: While not seen since 1973, Arab oil exporters could line up behind the Palestinian cause and against what they often describe as “Israeli aggression” to impose export curbs on the West, if not a full blown oil embargo. The Palestinian Authority has called for an emergency meeting of the Arab League, as has Morocco – the current chair. Admittedly, while plausible, such is scenario is extremely unlikely too. In concert with Russia, the oil producers’ group OPEC+ is already limiting supplies to the tune of 1.3 million barrels per day (bpd). Such a move may also potentially backfire, as currently elevated oil prices are already leading to market survey evidence of tepid demand. Wider consumer confidence has also taken a knock due to a strong dollar and high interest rates in key markets.
Overall, oil prices appear to be on track to recover some of the ground lost over the past week. But a further spike in prices towards $100 will likely need one or more of the above scenarios to wholly or partially materialize. The needle is unlikely to move substantially until that happens.
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