Oil markets on tenterhooks as Hamas attack stokes contagion fears

Global oil markets are poised for a potential price rally when trading reopens on Oct. 9 amid fears that a major, surprise attack by Hamas militants on Israel could escalate further to threaten energy flows in the region.

Israel was still struggling to reassert control over parts of its southern communities on Oct. 8 after scores of militants stormed the Gaza border the day before.

The unprecedented attacks came after crude futures markets had settled sharply lower on the week, as fears over the health of the global economy dragged Brent prices down 10% since Sept. 28. Crude prices fell almost 6% on Oct 4 alone, in the biggest one-day sell-off since September 2022, ending a rally that began in June when fresh output cut pledges by Saudi Arabia and Russian pushed prices toward $100/b. Platts, a division of S&P Global Commodity Insights, assessed physical Dated Brent at $88.20/b on Oct, 6, the lowest since Aug 31, 2022.

"Oil demand responds primarily to prices and physical interruptions and market sentiment could react swiftly to the tragedy in the Middle East as far as oil prices are concerned," Kang Wu, global head of oil demand research at S&P Global Commodity Insights, said. "Unless oil prices spike and sustain at higher levels, global oil demand, which is heading down sequentially toward Q1 2024, will not be affected significantly. However, as an increasing number of flights in and out of Israel have been canceled, the impact can still be felt to a certain extent."

The conflict comes amid a backdrop of OPEC+'s biggest producers Saudi Arabia and Russia looking to support global oil prices as they dip back from the recent rally. Riyadh and Moscow said on Oct. 4 that they would continue to voluntarily restrict supply by 1 million b/d and 300,000 b/d, respectively, through December. There will be another review in November, presumably at the same time as the OPEC+ ministerial meeting scheduled for Nov. 26.

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Political reaction

Some analysts described the attack as the worst inside Israeli territory since the Jewish state was founded in 1948. At least 300 people have been killed in Israel, and Hamas has taken an unknown number of civilian and military hostages. Retaliatory attacks by the Israel airforce in Gaza have also killed at least 300, according to reporting by the BBC.

Although Israel and Palestine are not significant producers oil producers or consumers, the conflict threatens the wider oil-rich Middle East region if it escalates further, according to market watchers.

Hamas has called on Palestinians and other Arabs to join the action to "sweep away the [Israeli] occupation." Saudi Arabia on Oct. 7 called for an immediate halt to the escalation, adding that it has warned repeatedly about the dangers stemming from "continued occupation" and "the deprivation of the Palestinian people of their legitimate rights."

Speaking after the attacks on Oct. 7, US President Joe Biden referred to America's "rock-solid and unwavering" support for Israel which was "under attack orchestrated by a terrorist organization." The US military's Central Command said Oct.7 it was "closely tracking" the situation and "stands with Israel" in the attacks.

Escalation potential

Energy market fears are expected to center around concerns that the latest conflict could draw in the powerful Lebonon-based militant group, Hezbollah and potential Israeli direct action against Iran, which backs both Hamas and Hezbollah militants.

Iran's foreign minister Hossein Amir-Abdollahian said the attacks by "resistant groups" in Gaza came about because of crimes by Israel against Palestine, Mehr news agency reported on Oct. 8. As a result, energy markets will likely be watching closely to see if Israel publicly blames Iran for the attacks in order to gauge the potential for further escalation.

It may also stall or reverse progress on the landmark Abraham Accords that have eased some Middle East tensions and paved the way for greater foreign investment in the region. The US-brokered Abraham Accords in 2020 established relations with the UAE and Bahrain. Indeed, one local report on Oct. 8 cited a Hamas spokesperson saying the attacks were partly an attempt to scuttle the Abraham Accords and wider Saudi-Israel cooperation.

Most of the recent direct upstream energy investment in Israel has been to develop its significant Mediterranean natural gas fields.

Chevron -- which operates the major Tamar and Leviathan gas fields offshore Israel -- said Oct. 7 that it will continue to work in accordance with instructions from the country's energy ministry. The Tamar platform had been shut in the past because of conflict in the region.