Oct 10, 2023 - Energy & Environment

Mideast crisis a new risk for volatile oil prices

Illustration of a tank gun barrel with an oil barrel shoved inside of it.

Illustration: Aïda Amer/Axios

Fallout from Hamas' attack against Israel pushed up oil prices after a roughly weeklong slide — and they could go far higher if the conflict escalates.

Why it matters: Spurred by OPEC's machinations and growing geopolitical risks, crude recently hit its highest levels of 2023. Now gasoline prices, which have been falling of late, could be pressured too, with new inflation risks in tow.

The big picture: Oil's bounce reflects an unstable world, and more unease rippling through a tight market, even though violence isn't actually occurring in oil producing areas.

  • But the new Israel-Hamas crisis is unpredictable, with variables like whether evidence surfaces that Iran, a Hamas backer, was directly involved planning the attack.

What we're watching: The U.S. could tighten enforcement of sanctions on Iran, reversing growing exports helping to meet global demand.

  • Iranian barrels have provided a "relief valve at a time when Saudi Arabia and Russia other OPEC+ countries have made production cuts," according to Ben Cahill of the Center for Strategic and International Studies.
  • "The key question to me now is, does U.S. sanctions enforcement on Iran ramp up if there's evidence that Iran has materially supported Hamas and been involved in these attacks," Cahill tells Axios.

Threat level: A more direct impact would be escalation that affects production sites or oil shipping lanes, notably the Strait of Hormuz chokepoint that abuts Iran.

  • "While the worst-case scenario of a regional war has to be kept in view, it's not my base case," Vandana Hari of the firm Vanda Insights tells Bloomberg.
  • In a note, RBC Capital Markets analysts expect Israel to escalate its "long running shadow war" against Iran, which has involved moves like assassinations and cyber attacks.
  • "What is unpredictable is how Iran would respond to such an intensification and whether this ceases to be a purely covert conflict," the bank wrote.

The intrigue: Another wrinkle is the crisis hurting odds of a U.S.-brokered Saudi-Israel peace deal that could involve U.S. security guarantees for the kingdom.

  • That, in turn, could make the Saudis less likely to boost production.
  • "[A] normalization deal that provides the Kingdom with U.S. security guarantees potentially could bring newfound production flexibility in Riyadh (or, at minimum, make the Saudis more willing to answer the phone when Washington calls)," ClearView Energy Partners said in a note.

The bottom line: "[I]nvestors and traders will watch Israel's response closely, and the second derivative impacts on sanctions enforcement and ongoing regional negotiations," Jefferies analysts said.

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