Following Hamas’ unexpected attacks on Israel over the weekend, oil prices experienced a notable surge of 5 percent. This development signifies one of the most significant conflicts in decades. As reported by Bloomberg, the escalation of tensions in the West Asia region has raised concerns in global markets and reignited a war-risk premium.
West Texas Intermediate (WTI) crude oil traded near $87 a barrel, reflecting the rising anxiety in the energy sector. While immediate oil supply disruption remains low, there are fears that the conflict could evolve into a more extensive proxy war, potentially involving the U.S. and Iran.
As conflict in the region entered its third day, the combined death toll exceeded 1,100, intensifying concerns about the situation’s severity. The United States announced its decision to deploy warships to the region, underscoring the escalating nature of the conflict.
While the immediate threat to oil supply remains limited, the conflict carries the risk of spiralling into a more devastating regional crisis, potentially involving Saudi Arabia. Bloomberg cited ANZ Group Holdings Ltd. analysts Brian Martin and Daniel Hynes, who noted, “Key for markets is whether the conflict remains contained or spreads to involve other regions, particularly Saudi Arabia. Initially, it seems markets will assume the situation will remain limited in scope, duration, and oil-price consequences. But higher volatility can be expected.”
The turmoil in the West Asia comes at a time when oil markets had already faced challenges. Both WTI and global benchmark Brent futures had witnessed significant declines earlier in the month due to concerns about high interest rates and slowing economic growth, which had cast a shadow on demand prospects. These concerns had overshadowed the bullish sentiment that had driven a sharp rally in the third quarter, driven in part by prolonged crude output cuts led by Saudi Arabia.
The conflict further reduces expectations that Saudi Arabia will cut or eliminate its 1 million-barrels-a-day output curbs, according to Citigroup Inc. analysts Ed Morse and Eric Lee. Additionally, the risk of Israel launching an attack on Iran is growing, further complicating the geopolitical landscape.
The events in West Asia unfold after months of easing tensions between Washington and Tehran, with Iran’s crude shipments rebounding to a five-year high with the tacit approval of the United States. In an extreme scenario, Iran could retaliate by targeting the Strait of Hormuz, a critical waterway for the movement of nearly 17 million barrels of crude and condensate each day.
Helima Croft, an analyst at RBC Capital Markets, highlighted the potential implications for U.S. sanctions on Iran, “If Israel comes out and directly implicates Iran, we believe it will likely be difficult for the Biden administration to continue to adopt such a permissive sanctions regime. We anticipate that critics in Congress and elsewhere will contend that the White House is providing Iran with the financial wherewithal to sponsor such malign actors,” Bloomberg quoted her as saying.
While the impact on oil’s futures curve has been relatively moderate, with WTI’s prompt timespread moving into backwardation, signalling supply concerns, there remains uncertainty over how the situation will develop.
As per Bloomberg, Warren Patterson, Head of Commodities Strategy at ING Groep NV, noted, “The lack of movement in WTI timespreads suggests there’s little change in supply-demand fundamentals at the moment. Although uncertainty over how the situation evolves is likely to support prices.”