Israel’s Gaza Invasion Looms as Oil Prices Surge: What you need to know

Oil prices are on the rise once again amid escalating tensions in the Middle East. Israel is preparing to potentially invade Gaza as early as Saturday, while the United States tightens sanctions on major crude-producing countries. This combination has sparked fears in the market of a drop in oil supply as demand continues to increase.

On Friday morning, the price per barrel of West-Texas Intermediate, the benchmark for oil produced in the U.S., surged over $3 to reach $86.10. Brent crude, the leading European benchmark, also experienced a similar jump to $89.10. Additionally, Murban crude, which measures oil loaded at a major port in the UAE, leapt to $91.10. These prices represented a nearly 4% increase from the previous day.

The surge in oil prices began earlier in the week following a surprise attack by Hamas militants on towns and a music festival in southern Israel. The attack resulted in the massacre of 1,200 Jewish civilians, making it one of the deadliest incidents since the Holocaust. In response, the Israeli military increased bombings in Gaza, raising concerns of a wider conflict that could trigger an international oil crisis similar to the Yom Kippur War in 1973.

While both Israel and Palestine have minimal oil production, the war’s broader impact on the region is causing market speculators to bid up oil prices for fear of disruptions in oil flow. However, experts suggest that as long as the conflict does not spread to involve more countries in the Middle East, the effect on the oil market will remain relatively muted.

After initially soaring, oil prices dipped midweek before spiking again on Friday. Despite this volatility, the national average price per gallon of gasoline in the U.S. fell by 12 cents this week to $3.64, according to data from the American Automobile Association.

Looking ahead, the Energy Information Administration has adjusted its forecast for next year’s supplies, predicting a potential 8% spike in Brent crude prices, reaching $95 per barrel. The agency also expects U.S. inventories of crude to decrease by nearly 3% in 2024 compared to their previous outlook.

In terms of refining capacities, U.S. refineries operated at nearly 86% capacity, processing an average of 15.2 million barrels per day in the week ending Oct. 6, according to Energy Information Administration data. While U.S. imports of crude increased in the past month and continued to pick up pace last week.

In addition to the Middle East tensions, the U.S. recently imposed sanctions on two shipping companies for violating the oil price cap set by the Group of 7 rich democracies, which includes Canada, France, Germany, Italy, Japan, the United Kingdom, and the U.S. These penalties mark the first time companies have been sanctioned for violating the cap.

Meanwhile, as the U.S. aims to isolate Russia and reduce Moscow’s financial resources from oil sales, the White House has relaxed its enforcement of sanctions on Iran. This has allowed Iran to resume its role as one of the world’s top crude producers as the U.S. engages in diplomatic talks with Hamas’ chief backer.

However, as a retaliation against Tehran’s support for Hamas, the U.S. and Qatar have agreed to halt payments on a deal that would have paid Iran $6 billion in exchange for the release of American prisoners. The Biden administration is expected to further tighten sanctions on Iran, reducing Iranian oil’s access to the global market.

Before these recent developments, oil supplies were already constrained, partly due to Saudi Arabia voluntarily reducing drilling to increase export earnings, despite urging from the Biden administration to boost supplies. Different countries are responding to the volatility in oil prices and the need to combat climate change by restricting new drilling and promoting renewable and nuclear energy.

Despite the current spike in prices, experts believe that the recent conflict in the Middle East and other factors are just temporary blips in the oil market and that demand for oil will continue to rise as economies recover.