Oil Holds Bulk of Israel War Surge as Regional Tensions Simmer

Oil dipped — after the biggest jump in six months on Monday — as the fallout from Hamas’ surprise attack on Israel over the weekend didn’t appear to pose any immediate risk to global crude flows.

(Bloomberg) — Oil dipped — after the biggest jump in six months on Monday — as the fallout from Hamas’ surprise attack on Israel over the weekend didn’t appear to pose any immediate risk to global crude flows.

West Texas Intermediate fell below $86 a barrel after surging 4.3% on the first day of trading after the assault. Israel beefed up its military with a record mobilization of army reservists, while Hamas threatened to execute hostages. However, the lack of any direct involvement from Washington and Tehran has eased fears of a wider regional conflict, for the time being at least. 

While Israel and Palestine play an insignificant role in the world of oil, the Middle East accounts for around a third of global supply, and the market is still worried about potential threats. Stricter enforcement of US sanctions on Iranian crude exports and any blockades or attacks on vessels in key shipping lanes are the main risks, meaning most of Monday’s surge is still intact. 

With the first tranche of US security aid for Israel on the way and more assistance expected soon, Washington has warned Iran to stay out of the fight but stopped short of further escalating tensions in the region. President Joe Biden said at least 11 American citizens had died with others likely held hostage by Hamas. He plans to speak about the attacks later today. Iran denied on Monday that it was involved in the assault.

“When we’ve seen Palestine-Israel conflicts in the past, the price premium that we’ve seen baked into oil prices has been quite temporary” because of the limited impact on supply, Vivek Dhar, an analyst at Commonwealth Bank of Australia, said in a Bloomberg TV interview. Currently, there’s a “real scenario where there is disruption,” depending on how much blow-back there is against Iran, he said.  

The conflict has ratcheted up oil’s volatility, following swings over the past month as concerns over high interest rates and slowing growth halted a rally that had been underpinned by Saudi Arabian-led output cuts. 

It’s also temporarily turned the spotlight away from demand and supply fundamentals, with OPEC on Monday raising its forecasts for global oil demand through to the middle of the century. Thursday will see a flurry of indicators — including monthly market reports from the cartel and the International Energy Agency, as well as weekly US inventory data. 

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–With assistance from Sarah Chen and Serene Cheong.

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