Key Insights
- Oil prices fell as Israel launched a ground offensive in Gaza, but concerns about supply disruptions remained due to escalating conflict.
- Prices initially rose above $90 on Friday but retreated as the immediate supply impact seemed limited.
- The potential for Iranian retaliation adds uncertainty; the conflict could threaten the critical Strait of Hormuz, responsible for a fifth of the world’s oil supply.
Oil prices drifted lower on Monday despite escalating clashes between Israel and Palestinian militants that have raised concerns about potential supply disruptions in the Middle East.
Brent crude, the global benchmark, fell 1.1% to $89.52 a barrel, while U.S. West Texas Intermediate crude declined 1.2% to $84.55. Prices remain volatile as the conflict in Gaza enters a more dangerous phase.
Oil Falters on Israel-Gaza Conflict Escalation
Over the weekend, Israel launched a ground offensive into Gaza after over a week of airstrikes aimed at degrading the capabilities of Hamas. Israeli Prime Minister Benjamin Netanyahu warned the military operation could be “long and difficult.”
The escalation briefly sent oil above $90 on Friday as traders priced in risks of wider conflict disrupting regional crude flows. However, prices retreated Monday amid indications the immediate impact on supplies may be limited.
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I think the market had priced in the incursion on Friday and tonight is more ‘sell the fact, said Bob McNally, president of Rapidan Energy Group.
Nonetheless, the potential for Iranian retaliation against Israel introduces new uncertainty. Iran supports Hamas militants, and Israel has accused Tehran of provoking attacks by proxy groups in the region.
Any direct blows between Israel and Iran could threaten traffic through the critical Strait of Hormuz, which handles a fifth of the world’s oil supply. Bank of America warned last week that oil could spike above $250 per barrel if the strait is closed.
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For now, the greater risk seems to be elevated volatility and layers of geopolitical uncertainty that make stable oil pricing challenging. Traders may continue adding risk premiums to account for unpredictable flare-ups.
The murky outlook comes ahead of a key Fed policy meeting this week where officials are expected to raise interest rates again to fight inflation. Higher rates tend to dampen economic activity and oil demand.
While the Israel-Gaza conflict is alarming, markets remain focused on central bank tightening and economic headwinds. Unless the violence escalates dramatically, those factors will likely continue driving oil in coming weeks.
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