The 7 October Hamas attacks on Israel will have oil market repercussions if the conflict widens to include Hezbollah or Iran. There will likely be calls to ratchet up sanctions enforcement on Iranian oil exports, which have increased in the past 6 months. Normalization talks between Saudi Arabia and Israel could be suspended amid deepening Israel/Palestinian conflict, closing off an important avenue of US/Saudi cooperation. A key issue to watch in the weeks and months to come is whether disrupted oil supplies from Iran or a sustained oil price increase will alter Saudi Arabia’s plans to unwind its production cuts.
Q: What was the immediate market impact?
A: Brent crude prices rose to nearly $89 per barrel when Asian markets opened on 9 October, before settling back a bit. Front-month Brent prices had dropped the week before by some 11% from their late September peak, but oil prices have now regained some of that ground. However, the price bounce was relatively limited, suggesting that, for now, the market is not concerned about a major disruption to either supply or demand. Any conflict in the Middle East can create a geopolitical risk premium, but a more dramatic price impact may not materialize unless the conflict draws in other states and non-state actors. Israel has negligible oil output but is a sizeable natural gas producer. Following the attack, the country suspended production at its offshore Tamar gas field, which supplies the domestic market as well as Jordan and Egypt. Israel’s energy ministry noted that, if necessary, it could declare a state of emergency that would allow the government to allocate natural gas to various consumers in the event of supply shortages.
Q: What would increase the oil market impact?
A: Iran would be the vector for a broader market impact. So far, US and Israeli officials have avoided blaming Iran for direct involvement in Hamas’ unprecedented attacks on Israeli civilians and military installations. But, for years, Iran has supported both Hamas and Hezbollah to pressure Israel on multiple fronts as part of its “axis of resistance.” If evidence surfaces that Iran provided material or financial support for Hamas’ attacks, one obvious way to exact a toll is to ratchet up enforcement of sanctions on Iran’s oil exports. Between May and September of this year, Iran’s crude oil and condensate exports averaged some 1.4 million B/D, returning to levels not seen in at least 4 years. There is a widespread perception in the oil market that the United States has relaxed its sanctions enforcement on Iran as it negotiated over last month’s release of several political prisoners, among other issues. The uptick in Iran’s oil exports since May helped to offset deep production cuts by Saudi Arabia and other producers. If stronger sanctions enforcement curtails Iranian volumes in the fourth quarter of this year, anticipated supply deficits could grow even wider.