Oil prices surged over 4.5 percent to $87 per barrel, marking a significant reversal from the 8 percent fall observed in the previous week, after an attack by Hamas on Israel intensified concerns over escalating geopolitical tensions in the Middle East. The incident raised alarm bells across the global oil market, given the region's significance as a major oil-producing and exporting hub.
However, the attack on Israel is not expected to have a direct impact on crude oil supplies, analysts say. Israel, despite facing regional turmoil, maintains two oil refineries with a combined capacity of 300,000 barrels per day (bpd), while Palestine produces no oil. Therefore, the immediate disruption to oil production and distribution in the region remains limited.
Meanwhile, concerns persist over the potential for further escalation in geopolitical tensions, especially with reports suggesting Iran's involvement in planning such attacks. In response to these concerns, several key oil-producing nations, including Bahrain, Iraq, Kuwait, Oman, the UAE, and Saudi Arabia, have reaffirmed their commitment to adjusting oil output to stabilize the global energy market. These nations play a crucial role in mitigating any supply disruptions and maintaining oil price stability in times of geopolitical uncertainty.
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The sudden spike in oil prices can be attributed to a combination of factors, with geopolitical tensions taking center stage as a leading driver. "Much will depend on if the crisis turns out to be short term flare or a bigger war between Israel and Iran," noted YArdeni Research. "Israel and Palestine are not major oil players, but the conflict sits in a wider key oil producing region, and has the potential to conflagrate further," Vandana Hari of Vanda Insights said.
"Increasing geopolitical risk in the Middle East should support oil prices, higher volatility can be expected," ANZ Bank said in a client note, while the Commonwealth Bank of Australia said that "for this conflict to have a lasting and meaningful impact on oil markets, there must be a sustained reduction in oil supply or transport".
While oil fundamentals have not changed since these attacks, it does not mean they won’t. There are reports that Iran helped Hamas plan the attacks and gave them the green light. If this is proven to be true, we could see the US, an ally of Israel, taking a tougher stance against Iran, which could ultimately lead to a reduction in oil supply, noted ING.
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