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Oil Markets in the Crossfire

By:Thomas Westwater

Will the Israel-Hamas conflict spark price instability? Eyes on Iran.

  • The Israel-Hamas conflict puts oil traders on edge.
  • Are oil markets at risk from this conflict?
  • Traders should keep an eye on any escalations.

Crude oil prices (/CLV3) advanced 4.34% on Monday in the first full day of trading since the militant group Hamas attacked Israel.

That marked the biggest one-day percentage gain since April. The geopolitical risks now being injected into the market are underpinned by an already tight supply situation amid supply constraints and a resilient global economy.

crude oil

How could the conflict affect oil prices?

In 1973, Arab countries, led by Saudi Arabia, placed an oil embargo on certain countries that supported Israel in the Yom Kippur War. That sent oil prices surging nearly 300% and was a big shock to the global economy.

The world energy market is a different place today, though, and as of now it doesn’t look like we will repeat a story like what happened nearly 60 years ago. Even if there was appetite to use oil as a weapon among some Arab countries, it wouldn’t wield the same consequences, as the U.S. is much more energy independent now.

Besides for the initial geopolitical risk premium, the Israel-Hamas conflict doesn’t look like it will have a notable impact on the supply-demand balance or inventory of oil, which is the two primary price drivers for the commodity.

Iran is a wild card

Iran represents a big wild card to global energy markets. Supply is already tight amid ongoing OPEC+ production cuts and a resilient U.S. economy. And while Iran’s oil exports have been heavily sanctioned by the U.S., the country has still managed to push its oil out to the global markets as Washington turns a blind eye.

Currently, however, a U.S. carrier strike group is set to arrive in the Eastern Mediterranean on Tuesday. It serves as a strong message of support from Washington to Jerusalem, and as a deterrent to those who are thinking of intervening in support of Hamas.

A U.S. carrier strike group is an enormous show of force, with the flotilla thought to possess the capability to rival most countries’ entire militaries, and others describing it as the epitome of 21st century military might.

Still, traders are concerned with Iran tightening its grip on the Strait of Hormuz, a vital oil supply line for seaborne crude shipments. Tensions have already been escalating in the Persian Gulf, and the U.S. recently dispatched a Marine expeditionary unit to the region to bolster an already-heavy military presence.

Traders should keep an eye on military actions in the region

If Iran-backed militant groups interfere in Israel it could force a U.S. response, although it is hard to predict what that would like. However, Iran could respond by attempting to block the Strait of Hormuz.

If that were to happen, it could send oil prices surging higher, as it would deter most ships from the shipping lane and cause insurance rates to skyrocket for those who remain willing. Around 30% of global oil supply traverses through the strait.

Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater 

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