The war between Israel and Hamas has again triggered uncertainties in the global oil markets, after the havoc caused by the Russia-Ukraine war last year.
However, the conflict between Israel and Hamas has not led to a similar price surge as witnessed last year but concerns loom as the Middle East accounts for one-third of the global oil supplies.
Crude oil prices, which had spiked immediately after the war, have comparatively cooled down but still remain elevated.
How have oil prices reacted so far?
Crude oil prices jumped around 5 percent after Hamas launched a large-scale surprise attack on Israel on October 7.
However, days following the launch of the war, prices slightly cooled down as the conflict does not have a direct impact on oil supplies and also due to macroeconomic concerns.
Prior to the geopolitical tensions in the Middle East, crude oil prices were already elevated due to supply tightness in the market. The largest oil producers in the world, Saudi Arabia and Russia, had announced additional supply cuts starting July, which had led to rising oil prices.
Saudi has cut production by 1 million barrels per day (bpd) while Russia reduced exports by 300,000 bpd starting July till the end of 2023. With recent concerns over the heightening of conflict in the Middle East, crude oil prices touched $91 per barrel on October 16.
Why are oil prices impacted?
Even though Israel or Palestine are not major oil producers, crude oil prices have remained sensitive to the war between the two countries as Hamas is backed by Iran. However, Iran has denied any involvement in Hamas’ attack on Israel.
Iran, which is a major oil producer, has been shunned by US sanctions, but, according to reports, exports from the country have increased in recent years. Reports also point out that oil production in the country has reached pre-2018 levels.
Iran’s possible involvement in the war in an already supply-strained market could lead to a further rise in oil prices.
Other factors driving crude prices
In addition to geopolitical tensions and supply tightness, crude oil prices are also reacting to possible easing of sanctions on Venezuela by the US.
Venezuela, also a member of the Organisation of Petroleum Exporting Countries (OPEC), was buried under sanctions by the US in 2019 after President Nicolas Maduro claimed victory in a 2018 election—considered fraudulent by the US.
However, the market shows optimism as talks between Venezuela and the US progress, leading to additional oil to a supply-strained environment. According to a Reuters report, a US-Venezuela deal is expected to be announced on October 17.
Possible supply disruptions
Other than worries over supply disruptions from Iran, supply concerns also loom over the global oil market if the war spreads to other nations in the Middle East.
Instability in the Middle East region, which supplies close to one-third of world’s crude oil, could adversely impact oil prices.
Unlike after the start of the Russia-Ukraine war, when oil supply was immediately affected as Moscow is one of the largest producers, war between Israel and Hamas has not directly impacted supplies as of now.
However, worries over supply disruption from the Middle East continue, with Israel retaliating.
Impact on India
Volatility in the international oil markets directly impacts India as the country is dependent on imports for meeting over 85 percent of its crude oil requirements.
Union Minister of Petroleum and Natural Gas Hardeep Singh Puri has earlier said that India is closely monitoring the conflict between Israel and Hamas and the country would navigate through the issue, if oil supply is not disrupted.
India sources a major amount of crude oil from the Middle East, especially from Saudi Arabia and Iraq. In September, Saudi supplied 13 percent of India’s total crude imports while Iraq provided 23 percent.
Even with rising crude oil prices, domestic fuel prices are not expected to be hiked with general and state elections approaching. However, the performance of state-run oil marketing companies (OMCs) would be adversely impacted if they are unable to pass on cost increases to customers.
OMCs, including Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation, have left retail fuel prices unchanged since April 2022.
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