War premium returned to the oil market on Monday after the weekend attack by Hamas on Israel, which upended—again—the geopolitical landscape in the world’s most important oil-exporting region, the Middle East, and buried hopes of an imminent Saudi-Israel rapprochement that could ease the tight oil market.
The Hamas attack on Saturday took place just as several Middle Eastern countries, including the large oil producer the United Arab Emirates (UAE), had started to normalize relations with Israel. The U.S. Administration was also reportedly working on a Saudi-Israel normalization in relations.
On Friday, The Wall Street Journal reported that Saudi Arabia, the world’s top crude oil exporter, could be willing to raise early next year its oil production— currently at around 9 million barrels per day (bpd) due to a voluntary cut of 1 million bpd—if oil prices are too high, to win goodwill at U.S. Congress. A possible agreement would have led to Saudi Arabia recognizing Israel in exchange for a defense deal with the United States.
On Saturday and the following days, it became clear that a deal could be dead in the water and that the geopolitical risks to oil prices were once again focused on the Middle East.
The Hamas attack breached the relative calmness in the region which has seen Saudi Arabia and Iran restore diplomatic relations and the UAE and Iran improving relations in what analysts believed to be a sign of de-escalation of the tensions in the region.
After the attacks, Israel declared war on Hamas and began to retaliate for the Saturday incursions of Hamas fighters on its territory.
Analysts will be closely watching if Israel publicly blames Iran for direct or indirect involvement in the attacks, and if the conflict will spread from Israel and the Gaza Strip to the wider Middle Eastern region.
“This is no less than Israel’s 9/11,” Ian Bremmer, the president of Eurasia Group, said on Saturday.
What would happen next could include “War in the region (which could expand), massive civilian casualties, and the Israeli-Saudi deal (which was close to getting done) is now over,” Bremmer added.
In the wake of the Hamas attack, Saudi Arabia called for “an immediate halt to the escalation between the two sides, the protection of civilians, and restraint.” But it also “recalls its repeated warnings of the dangers of the explosion of the situation as a result of the continuation of the occupation, the deprivation of the Palestinian people of their legitimate rights, and the repetition of systematic provocations against its sanctities.”
The situation could be contained, but all eyes would be now on Iran, analysts say.
“So far there is no sign that Iran and Hezbollah plan to join. As long as this is the case the global impact is limited,” Zvi Eckstein, former deputy governor at the Bank of Israel and currently emeritus professor of economics at Tel Aviv University, told CNBC.
Oil supply from Iran, which has been rising in recent months due to weaker enforcement of the U.S. sanctions, could begin to shrink again, analysts say.
According to Warren Patterson, Head of Commodities Strategy at ING, “The softer approach from the US is likely due to concern over rising energy prices. However, it would be difficult to see the US maintaining this stance if Iran is connected to these attacks, whether directly or indirectly.”
If the enforcement of these sanctions becomes stricter, it could lead to a potential loss of at least 500,000 bpd of oil supply, which would wipe out the currently anticipated surplus for 2024, according to ING.
The Hamas attack “could eventually have an impact on supply and prices,” popular hedge fund manager Pierre Andurand said.
“The market will eventually have to beg for more Saudi supply, which I believe, will not happen sub $110 Brent,” he added.
“As Iran is also behind Hamas’ attacks on Israel, there is a good probability that the US administration will start enforcing those sanctions on Iranian oil exports more tightly. That would further tighten the oil market,” Andurand wrote on X on Saturday.
“Also the probability that this will lead to direct conflict with Iran is not zero.”
By Tsvetana Paraskova for Oilprice.com
