Israel-Hamas Conflict Could Have Limited Impact on Oil Prices

Key Takeaways

Crude oil prices jumped more than 4% Sunday as a new wave of fighting broke out between Israel and Hamas, but they’re not thought likely to rise steeply as a result of the conflict.The biggest concern for oil markets would be a new round of U.S. sanctions on Iran, which is the world’s eighth-biggest crude producer and a member of OPEC.Any price gains could be short-lived if OPEC chooses to increase production quotas while rising yields and borrowing costs weigh on global demand and economic growth.

Crude oil prices jumped more than 4% Sunday as a new conflict broke out between Israel and Hamas, but the fighting is unlikely to have a significant long-term impact on prices.

That’s because unlike other Middle Eastern countries such as Saudi Arabia, Iraq, or Iran, Gaza doesn’t produce any oil, while Israel produces just a small amount, mostly for its own use.

The biggest risk to oil markets, according to analysts at Morningstar, is whether Israel will retaliate against Iran for providing support to Hamas. OPEC member Iran is the world’s eighth-biggest producer of crude, with output averaging 3.67 million barrels per day as of last year, which is 5% of the world’s total. As such, any major disruption to this output could constrict global supply, causing prices to rise, at least in the short run.

Iranian production could also be affected if the U.S. chooses to impose additional sanctions on Iran in a show of support for Israel.

U.S. sanctions on Iran aren’t a new phenomenon, dating back to the 1979 Iranian Revolution. In the past two decades, sanctions have focused on preventing Iran from developing a nuclear arsenal.

The 2015 Nuclear Deal, which was entered into under the Obama administration, eased the burden of sanctions on Iran’s economy in exchange for restrictions on the country’s nuclear program. Former President Donald Trump withdrew the U.S. from the deal in 2018.

Even in the event of sanctions, price gains could be limited, as OPEC+ can easily adjust production quotas to influence prices. If OPEC member states decide to increase production, there’s more supply and prices will fall.

Prices could also fall if interest rates and yields on government bonds continue to rise worldwide, raising borrowing costs and slowing the outlook for global growth. That in turn would decrease demand for oil, lowering prices.

While crude prices rose significantly over the weekend, they remain well below their September peak, after a pullback earlier this month. The price of West Texas Intermediate (WTI) crude—the U.S. benchmark—peaked recently at $95 per barrel on Sept. 27. It traded just under $85 per barrel as of 10 a.m. ET Wednesday.


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