Oil prices experienced a decline despite the entry of Israeli ground forces into the Gaza Strip, which raised tensions in the Middle East. Investors are closely monitoring the U.S. Federal Reserve’s monetary policy meeting scheduled for later this week. This development has led market analysts to anticipate the addition of an additional war-risk premium in the coming week.
Global benchmark Brent crude oil saw a 1.06% decrease, trading at $89.52 per barrel, while U.S. West Texas Intermediate (WTI) futures declined by 1.16% to $84.55 per barrel.
Bob McNally, the President of Rapidan Energy Group, stated that the market had already factored in the incursion into Gaza, and the current dip in oil prices could be attributed to investors acting on this information. He noted that the ground operations in the region had remained limited thus far, and the market was also concerned about other macroeconomic factors.
The Federal Reserve is expected to maintain its current interest rates at the conclusion of its two-day meeting on Wednesday. This decision follows a stronger-than-expected growth in the U.S. economy, which expanded at a rate of 4.9% annually during the third quarter.
Israeli Prime Minister Benjamin Netanyahu announced during a Saturday press conference that Israel had entered the second phase of the conflict, anticipating a “long and difficult” campaign as ground operations expand in the Gaza Strip.
Late on Friday, oil prices surged, with Brent crude surpassing $90 per barrel. This increase in prices coincided with Israel’s announcement of an escalation in its ground operation in Gaza, aimed at eradicating the militant group Hamas.
While a significant disruption in oil supply is not the base-case scenario, the oil market had become somewhat complacent about the possibility of a major Israeli ground incursion into Gaza and the risk of a broader regional conflict. This has led to the expectation of an additional war-risk premium being added to oil prices due to the latest developments in the Middle East.
ANZ, a bank, shares a similar perspective, noting that the escalation of the conflict raises concerns about the potential for supply disruptions, which have been looming over the market since Hamas initiated its attack on October 7.
Despite the limited involvement of both Israel and the Palestinian territories in the global oil market, the conflict’s location in a key oil-producing region raises fears that the war could spill over into neighboring areas in the Middle East. U.S. National Security Advisor Jake Sullivan also expressed concerns about an “elevated risk” of the conflict spreading to other parts of the region.
Particularly worrisome is the possible involvement of Iran. Iran is a significant oil producer and a key supporter of Hamas. Israel’s military has accused Iran of ordering attacks by militia groups it backs in Yemen, Iraq, and Lebanon, providing intelligence to Hamas, and using online messaging to bolster anti-Israel sentiment.
Bank of America recently issued a warning that any retaliation against Iran could jeopardize the passage of vessels through the Strait of Hormuz, a critical channel in the global oil transit network. The Strait of Hormuz is considered the world’s most important oil transit chokepoint, and if it were to close, oil prices could potentially spike above $250 per barrel.
In conclusion, oil prices have seen a decline despite heightened tensions in the Middle East due to Israeli ground forces entering the Gaza Strip. Investors are closely monitoring the Federal Reserve’s monetary policy meeting, and there is an expectation of an additional war-risk premium being added to oil prices in response to the evolving situation in the region. The potential for a broader regional conflict and the involvement of key players like Iran add to the uncertainty in the oil market.
