Israel-Hamas Conflict’s Impact on Oil Prices

Oil experts remain attentive to the Israel-Hamas conflict as it is expected to affect oil supply and prices due to its geopolitical implications. Following a surprise attack by Hamas, part of the long-standing Arab-Israeli conflict, against Israel on Saturday, Israeli Prime Minister Benjamin Netanyahu declared that they are "at war." The conflict has resulted in numerous casualties and experts say it could potentially have significant effects on numerous economic activities at a global scale.

Palestine and Israel are not big oil producers, however, it is the consequences of the escalation of the conflict that make the market speculate over shorter supply, driving up oil prices.

According to The Wall Street Journal, Iran, an important oil producer, supported Hamas in carrying out the attack. Meanwhile, the US is a critical ally to Israel as it has strained relationships with Iran. According to experts, the motives behind Iran’s support, based on Hamas’ statements, focus on the diplomatic proximity between Saudi Arabia and Israel, as Saudi Arabia was in talks with the US to establish a dialog with Israel for the first time.

Iran is part of the three countries that control the Strait of Hormuz, along with the Arab Emirates and Oman, all members of OPEC. Through this strait flows approximately between a fifth and third of the world's oil supply coming from Saudi Arabia, Iraq, Kuwait and Qatar. This oil is exported to Saudi Arabia, the US, Singapur, China, India, among other countries. The strait has the potential to be weaponized by Iran to disrupt oil supply to combat growing support for Israel, according to various experts.

Following the attacks and war declaration, oil prices increased approximately 4% in a single session. Brent oil is close to US$90/b, although still below the US$95/b peak of September, on the back of a strained supply driven by OPEC.

Central banks have had the hard task of fighting inflation amid OPEC’s attempts to increase oil prices. Now, the potential of this conflict to further drive oil prices up poses a challenge for banks. As reported by El País, natural gas prices experienced a notable 12% increase in Europe, following the closure of the Israeli Tamar field. While Israel's contribution to Europe's natural gas supply is relatively modest, the ongoing shortages in Russian natural gas supply have rendered the market highly sensitive to such developments.

Stock exchanges and financial markets in Latin America opened lower on Monday as the conflict develops. According to El País, rising oil prices and the risk of higher inflation are straining global economies. While it is expected that oil exporters in Latin America such as Colombia and Brazil may benefit from increased demand for their oil, Mexico, which imports fuel, could see significant negative repercussions.