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Will Gaza conflict affect oil market adversely? Analysts answer

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Oil prices had tumbled around the last week of September 2023, as fears of a weakening global economic outlook spiked concerns of softening demand

The October 2023 conflict between Hamas and Israel (also dubbed as the most violent one in the Gaza Strip) did not appear to have any significant immediate effects on the near-term oil market inventories, according to a note from Goldman Sachs.

It did, however, add that the attacks lessen the possibility that the nation’s relations with Saudi Arabia will return to normal and that Saudi production will not increase as a result.

A day after Israel bombed the Palestinian enclave of Gaza in retribution for one of the worst strikes in its history, Hamas’ attack on Israel raised oil prices as markets priced in worries about a wider confrontation in the Middle East.

On October 9, Asian trading hours saw an increase of almost USD 3 in the price of oil, with benchmark Brent crude trading at about USD 87 per barrel.

However, the next day, the prices cooled down, as Brent crude, the key benchmark for Middle East’s oil producers, fell 0.2%, to USD 87.97 a barrel during early trading hours, while United States West Texas Intermediate crude slipped 0.2% to USD 86.22 a barrel.

Oil prices had tumbled around the last week of September 2023, as fears of a weakening global economic outlook spiked concerns of softening demand. Brent dropped about 11% and WTI dipped more than 8%, decline ratios that could not be managed to be offset by the market jumps seen on October 9.

Analysts are now unanimous in predicting that as the Israel-Hamas conflict gets deadlier, it will affect the global oil market movements too.

In its latest market note, Goldman Sachs stated that it still expected Brent to go to USD 100 by June 2024, noting that there hasn’t yet been any effect on current global oil production.

“Along with the decline in oil prices over the last two weeks and limited evidence for large draws in global commercial visible oil inventories over the past three months, this weekend’s developments reduce the probability of an early unwind of the Saudi production cuts,” the note stated further.

According to Goldman Sachs, the possibility of a short-term improvement in Saudi-Israeli relations is decreasing because of the rising confrontation. However, the bank continues to predict that Saudi Arabia will only gradually resume its additional 1 million barrels per day of production cutbacks by the first quarter of 2025.

According to the bank, its December 2024 Brent price projection would increase to USD 104 in a more probable scenario in which Saudi Arabia’s crude production remained constant at 9 million barrels per day.

The violence, according to Goldman Sachs, also increases the prospect of wider regional tensions increasing again, and the risks to its Iranian output predictions are now more pessimistic.

According to the report, the price of Brent oil at the end of 2024 would increase by a little over USD 1 per barrel for every 100,000 barrels per day decrease in Iran’s production in comparison to the baseline.

“The risk that this recent development transforms from a localized event to one that is prolonged and engulfs a wider range of nations should be among the key concerns for investors,” said Norman Villamin, Group Chief Strategist at Union Bancaire Privée (UBP) in a note on October 9.

“A prolonged conflict has the potential to draw in Iran and imperil the potential normalisation of Saudi-Israeli ties that are reported to be close to being announced,” he said.

“With Iranian exports and US releases from its strategic petroleum reserve having virtually fully offset Saudi supply cuts since September, a global response which reduces Iranian supply where Saudi Arabia does not compensate with increased production would create a renewed supply shock for global energy markets,” the official added further.

London-based consultancy Capital Economics told Zawya that the latest oil market volatility was not due to supply disruption, but the potential for it.

“Israel produces very little crude oil, but risks to production in the wider region are significant. These risks, unfortunately, become greater the longer the conflict goes on and if any other regional actors become embroiled in it. And they also come at a time when the global oil market already appears to be in a fairly large deficit,” the consultancy stated further.

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