Global oil market prices have climbed for two consecutive weeks since Hamas launched its shock attack on Israeli civilians on 7 October.
The deadly offensive sent tremors through the oil markets, causing prices to climb to $94 (£77) a barrel. It also reignited fears among oil traders and economists that markets could breach the $100 a barrel mark.
Many worry an escalation of tensions in the region could drive oil prices far higher by choking a key transit route for seaborne cargoes of oil and gas from the Middle East to the global market – threatening efforts by central bankers to tame high inflation.
Have oil and gas supplies been affected?
Not yet. The recent rise in oil and gas prices has been fuelled by fears that exports from the energy rich region could be disrupted – but to date oil and gas flows from the Middle East have remained relatively unscathed despite the Israeli-Palestinian conflict.
Israel doesn’t have significant oil reserves but after the 7 October attacks the government shut down production at its giant Tamar gasfield off its southern coast. This has limited gas flows to neighbouring Egypt, which typically exports about half of its gas via seaborne tankers, often to Europe.
Despite Europe’s record high levels of gas storage this winter, gas prices have climbed this week after a tanker seeking to fill up liquefied natural gas (LNG) in Egypt left empty and diverted to another port, stoking fears for Europe’s gas supplies.
“There’s no material loss to oil in the markets at the moment,” said Dr Neil Quilliam, an expert in Middle Eastern energy policy and geopolitics at Chatham House. “The one thing that could really shift the price was if the conflict spreads.”
How would an escalation of the war affect energy markets?
The Middle East’s oil and gas exports could still emerge as collateral damage if the ongoing conflict engulfs the region. Market observers expect that the US may soon toughen its sanctions on exports of oil from Iran, a major player in the commodity, due to Tehran’s close links to Hamas and Hezbollah.
Robert Ryan, the chief strategist at BCA Research, said there was a one in four chance that Iranian oil output could fall by a 1m barrels a day as a result of tougher US sanctions. He assigned the same odds to a slump in Russian oil output for the same reasons. This could lead to oil prices of $140 a barrel next year, according to Ryan. However, the impact of these sanctions could be eased if Saudi Arabia – which is restricting its oil output – were to increase its exports to help steady the market.
Quilliam said: “There’s no shortage of oil supply, it’s about getting that oil supply to the market. The real concern, the material concern, is the security of the Strait of Hormuz.”
The Strait of Hormuz in the Gulf is responsible for the transit of more than 20% of the oil consumed globally and a third of the world’s seaborne gas shipments, making it a vital energy artery for the global markets. If Iran sought to block the route this would have major implications for Europe’s supplies of gas from Qatar, the world’s top exporter of liquefied natural gas (LNG) and a longstanding backer of radical Islamist groups including Hamas. About 16% of Qatar’s exports were sent to the EU last year, making the country Europe’s second-largest source of LNG after the US. These supplies are considered crucial after the end of pipeline gas imports from Russia last year.
“It is unlikely that [the strait] would close but [military] activities in this area would be enough to push the price of oil very high for a short time at least,” Quilliam said. “It’s a well-rehearsed conversation and well-rehearsed eventuality for the leaders of many western nations.”
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Who are the Middle East’s biggest oil and gas producers?
Saudi Arabia is the region’s most powerful fossil fuel player and the de facto leader of the Opec+ oil cartel – the group responsible for calibrating global oil market prices by carefully controlling output.
Saudi Arabia is now producing about 9m barrels of oil a day, according to the International Energy Agency. The agency estimates that Iran and the United Arab Emirates both produce more than 3m barrels of oil a day. Russia, a key ally of Opec+, produces about 9m barrels of oil a day.
For these nations rocketing oil prices would bring rich economic rewards, but only to a certain point, according to Quilliam. Once prices move significantly above $100 a barrel the high cost of energy can cause economic activity to slow and dent demand for oil. This could provide an incentive for Saudi Arabia to increase its production to rein in runaway oil market prices.
Before the attack Saudi Arabia and Russia confirmed that they would continue to hold back more than 1m barrels of oil a day from the global market until 2024 in order to shore up oil prices, which had begun to flag due to worries about global economic growth. If needed, the pair could reverse this decision if a global oil price shock threatened to erode overall demand.
What roles do the US and Russia play?
For both energy companies the stakes are high. For Joe Biden, rising oil prices could spell defeat in the US elections next year, according to Ryan. For Russia, higher oil prices are vital to shore up the Kremlin’s coffers as it continues its war against Ukraine.
Biden’s attempt to broker a normalisation of Saudi-Israeli relations before the Hamas attacks might have seen the kingdom agree to US calls for an increase oil production, but the plan now risks being derailed. The US has moved two aircraft carriers into the eastern Mediterranean to deter Iran or Lebanon’s Hezbollah, both allies of Hamas, from getting involved in the conflict.
