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Effect of Israel-Hamas conflict on oil prices

Oct 15,2023 - Last updated at Oct 15,2023

While primarily rooted in political and territorial disputes, the Israel-Hamas conflict has sparked reverberations that extend into the intricate web of oil geopolitics in the Middle East. As the region grapples with the implications of this multifaceted battle, global attention must turn to the far-reaching consequences for the world's oil market and the delicate balance of power in the region.

Many questions are raised in the economic circles in general, particularly in the oil sector. These questions include: What are the oil implications of the current Palestinian-Israeli crisis? To what extent do these implications differ from those related to the Russian-Ukrainian crisis? What are the most important expected scenarios for global oil price movements in the near future in light of these implications? What are the most significant geopolitical considerations influencing the course of these scenarios?

Global energy markets have not recovered from the disruptions caused by the Russian-Ukrainian war, as they are now entangled in a new whirlwind of complex calculations with the start of the "Operation Al Aqsa Flood" and the threats of possible oil supply shortages in the markets due to the disturbances that may be caused by the ongoing war in the Gaza Strip. This is especially concerning with the continued Western support for Israel, including aircraft carriers, warships and fighters.

The escalating situation in the occupied Palestinian territories threatens to destabilise the broader Middle East region, while the global oil market closely monitors developments. Many questions are currently being raised about the economic consequences of this conflict, which the region has not witnessed since the October 6, 1973 war that ignited the oil crisis in the 1970s.

Although neither Israel nor Palestine rank as significant oil producers, the eruption of this conflict has set off alarms within the global oil industry. The Middle East, accounting for a third of the world's oil production, stands as a critical cornerstone in the global energy market. The escalating tensions have prompted concerns about potential disruptions to vital oil transportation passages like the Strait of Hormuz, the Suez Canal and the Bab Al Mandeb Strait, intensifying fears about the stability of global oil supply chains.

The recent incidents on October 7, 2023, marked by a surprise attack from Hamas followed by swift retaliatory measures from Israel, have sent the region shockwaves. The subsequent spike in oil prices by 5 per cent immediately underscores the vulnerability of the global oil market to regional conflicts. Amid the crossfire, the spectre of wider regional involvement looms large, with Iran emerging as a key focus of attention due to its support for Hamas and the potential for regional contagion.

The ripple effects of the conflict are being felt across various dimensions of the oil market, including investment decisions, production capacities and strategic alliances. The escalating violence has led to the shutdown of oil fields in Israel, amplifying concerns about the security of oil infrastructure in the region. While the conflict's immediate impact on the oil market is notable, the potential escalation poses a more substantial threat to OPEC's delicate balance of power. The regional implications of the war could affect production quotas, supply strategies and geopolitical alliances within the organisation. The involvement of key OPEC members could further complicate the interplay of political and economic interests in the region.

From a broader geopolitical perspective, the conflict has the potential to disrupt global oil supply chains, heighten demand and prices, and amplify the risk premiums associated with Middle Eastern oil. Furthermore, the strategic positioning of key players could influence market dynamics, with the possibility of manipulating output to exert control over global oil prices.

To avert a deeper crisis, it is imperative for the international community to prioritise diplomacy and negotiation as key tools in de-escalating the conflict. Efforts to ensure the safe passage of oil and secure vital oil supply chains must be bolstered to prevent further disruptions in the global energy market. As the conflict persists, a concerted effort to safeguard the stability of the Middle East's oil resources becomes a paramount global imperative. The restoration of peace in the region is not only crucial for the well-being of its people but also for the preservation of global economic stability and energy security.

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