Global oil prices surged higher Monday, reversing the market's sharp declines last week, following a series of attacks on Israel from Hamas fighters in the south from Gaza and Hezbollah-backed militants in the north from Lebanon.
The surprise moves, which triggered retaliation from Israel and threaten to escalate into a wider regional conflict over the coming weeks, could put as much as 20% of global oil output at risk if it were to expand into the key transit areas around the Strait of Hormuz.
Talks between the U.S., Israel and Saudi Arabia, meanwhile, aimed at normalizing relations between the middle east region's two major powers, have also been put on hold and could scupper a reported agreement that would have seen Riyadh reverse some of its current production cuts early next years in return for political cooperation.
"Israel is a very marginal oil producer, and so recent developments will have little direct impact on oil supply," said ING commodities analyst Warren Patterson. "However, given the rising tension in the region and the risk that the conflict could spread, market participants will remain nervous until there is a clear de-escalation."
"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'," he added. "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."
Brent crude futures for December delivery, the global pricing benchmark, were last marked $3.54 higher on the session at $88.12 per barrel.
WTI futures for November, which are tightly-linked to U.S. gasoline prices, were marked $3.65higher at $86.40 per barrel.
The moves also partly reversed some of last week's sharp declines, pegged to a projected slump in global demand, which saw both Brent and U.S. crude prices fall the most since March of this year.
Post Covid weakness in China, the world's biggest energy importer, as well as a looming recession in Europe and an expected slowdown in driving demand in the U.S. have combined to pull global oil prices lower over the past month.
The weekend conflict, however, could keep prices elevated for weeks, or possibly longer, as Israel vows to defend its borders and shutdown militant operations in Gaza and Lebanon.
"There is no doubt for us that the next month or two will see increased focus on the Middle East and the consequences of the situation for energy, politics and especially the dire situation for civilians on both sides," said Saxo Bank's chief investment officer Steen Jakobsen.
"Markets are concerned about the scale of not only operations in Israel’s immediate neighborhood in the Palestinian territories and Lebanon, but also the risk of escalation with Iran due to its sponsorship of forces hostile to Israel," he added. "Hence the focus will be on anything Iranian: new political initiatives, sanctions and risk of retaliation on Iran’s infrastructure."
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