After a surge this summer when oil prices approached $100 a barrel, the cost of crude was tumbling again. Now a Middle East war has sent it right back up.
Traders drove up the price of oil as much as 5 percent as fighting escalated between Israel and Hamas after the terrorist group attacked the Jewish state from Gaza over the weekend. Prices stabilized on Monday morning, but the global Brent oil benchmark appeared to be grinding back up toward $90 a barrel in the afternoon.
No oil is produced in the Gaza area, and Israel produces only a small amount of oil for its own use, energy analysts noted. But experts warned that prices could go higher if the fighting were to spread around the region, especially if Iran becomes actively involved in the war.
“Market sentiment could react swiftly to the tragedy in the Middle East as far as oil prices are concerned,” said Kang Wu, an energy analyst at S&P Global Commodity Insights.
Israeli retaliation to the Hamas attacks, including an invasion of Gaza, could pull Iran and other Persian Gulf countries into the conflict. Oil traders were waiting to see if Israel would explicitly blame Iran for the weekend attacks, a sign that an escalation could be imminent. Traders are worried that Iran might then seek to interrupt oil tanker traffic in the Strait of Hormuz, the primary passage for Gulf oil to the rest of the world.
Energy prices had been slumping over the past week in part because of recent unexpectedly strong growth in the output of oil from several countries, including some in the Organization of the Petroleum Exporting Countries, the oil cartel. Two main reasons were that economic growth in China remained weak, keeping demand muted, and that high interest rates had spurred concerns over growth in Europe and the United States.
The average price for a gallon of regular gasoline in the United States on Monday was $3.70, 11 cents below a week ago, according to the AAA motor club. A year ago, gasoline sold for $3.91 a gallon.
But that relief for drivers is now in jeopardy following a stunning geopolitical event, much as Russia’s invasion of Ukraine sent oil and natural gas prices skyward last year.
Israel has become an increasingly important player in natural gas markets as an offshore producer. But it is not normally a factor on oil markets. The country is a net oil importer of about 300,000 barrels a day, according to S&P Commodities.
Its relations with its Arab neighbors have improved in recent years, and the United Arab Emirates, the third largest producer in the Organization of the Oil Exporting Countries, has negotiated a number of business deals with Israel since the two countries signed a peace agreement in 2020. A brutal war between Israel and Hamas could test that relationship.
“War in the Middle East can be generically bullish for crude,” said Clearview Energy Partners, an analytics firm, in a research note on Sunday night, especially if the conflict is prolonged.
Global oil benchmarks rose a little over 5 percent when markets opened after the weekend, with the West Texas Intermediate oil price rising to $87 a barrel, a relatively modest jump when war is breaking out in the oil-rich Middle East. By midday Monday, the U.S. price was just above $86 a barrel.
The increase followed several days when prices slumped, bottoming out near $82 a barrel, on the expectation that demand for oil was waning. The inventories of American gasoline climbed last week to above the five-year average for this time of year. Only two weeks ago, many analysts were predicting a surge to $100 a barrel oil.
One reason oil prices had softened in recent days was growing speculation that Saudi Arabia, the United States and Israel were closing in on a political deal that could lead to an eventual Saudi recognition of Israel. There were hopes that Saudi Arabia might increase oil output to cut gasoline prices to help the Biden administration sell any deal to the U.S. Congress.
Saudi Arabia has insisted that Israel make major concessions to the Palestinians, but the conflict is likely to complicate the chances of any deal between Israel and Saudi Arabia.
Even though American, Canadian, Brazil and Guyanese oil production has ramped up in recent years, the Persian Gulf remains a key source and transit point for nearly one in every five barrels of global oil supplies, especially to Asia. Iran is still one of the biggest oil producers in the Middle East, despite Western sanctions in recent years.
Any indications that Hamas attacked Israel following prodding, financing and planning by Iran could escalate the conflict beyond Israel’s borders.
The Biden administration has softened sanctions on Iran in recent months, in part to encourage Iran to slow its nuclear program, allowing Tehran to export more oil into tight global markets. But pressure is likely to grow now to tighten sanctions again, as the Biden administration provides more aid to Israel.