Concerns Mount Over Supply Impact Despite Limited Oil Price Increase Amid Israel-Hamas Conflict

Over six months after the beginning of the Israel-Hamas war, its effects on oil prices have reduced to relatively limited changes. Nevertheless, worries about potential disruptions in the oil supply remain

On Monday, crude oil prices dropped by $1, coinciding with renewed diplomatic efforts by the US Secretary of State Antony Blinken during his visit to the Middle East. Following visits to Jordan and Saudi Arabia, Blinken arrived on Tuesday in Israel in a bid to reach a hostage deal and a truce.  

Since the Israel-Hamas conflict began, multiple areas of tension have flared up in the region. This includes the Houthis’ interference with global shipping in the Bab el-Mandeb Strait, heightened pressures along Israel’s northern border with Hizbullah, and, notably, the first direct clash between Israel and Iran. Initially, there was an uptick in prices across global energy markets. However, considering the broader perspective after over six months since October 7th, the overall impact on energy market prices has been insignificant. Nevertheless, experts caution that continued escalation of tensions could lead to more pronounced effects.

Thomas Gratowski, senior fellow in geo-economics at the Global Policy Institute, says that it is hard to identify exact causalities since oil and gas markets are driven primarily by the outlook for the global economy and, to some extent, monetary developments. “Remember, the demand outlook has been so negative that the OPEC+ extended their production cuts several times through to the middle of the year,” he said.

However, he tells The Media Line, “I would say the conflict is having an increasing impact on energy markets.”

Gratowski explains that despite a price reaction immediately following the October 7th attacks, markets have been relatively unaffected by the conflict for the first part of the last six months, “Expectations last year that oil prices could rise above $100 did not materialize. Of course, neither Israel nor Gaza is meaningful oil producers,” he noted.

Regardless, he points out that the Houthi attacks on cargo ships sailing through the Red Sea have changed the risk perception of the region as a transit route and of the potential impact of the conflict on global markets. 

He says that while some shipping companies have opted to re-route through the Cape of Good Hope, adding extra time and costs to their shipments, others continue to use the Red Sea route and pay higher insurance costs. He believes that these effects will remain long-term. “I think the risks for tankers won’t go away quickly since it will be nearly impossible to fully prevent the Houthis from attacking ships,” he said, noting that this is critical since, due to the European embargo of Russian oil, the Red Sea has become key for oil transports from the Gulf to Europe and Russian oil to Asia. 

He also cites one direct consequence of the conflict: ADNOC’s decision to suspend its stake offer in NewMed Energy. Overall, cooperation between Israel and Arab countries has become more complicated, including in the energy space.” 

Dr. Ramu C.M., a Berlin-based consultant on energy and international politics, tells The Media Line that fears of tighter energy supplies and a potential blockade of the Strait of Hormuz in case of a wider escalation involving Iran have further fueled concerns about oil and gas prices, which, he warns, “Could rise to sky-high levels if a region-wide conflict occurs.”

“A wider conflict with Iran could also impact energy infrastructure around the Gulf,” Gratowski says, adding that although the US and Iran have been able to contain a potentially vicious retaliatory cycle so far, an escalation cannot be ruled out. 

He also notes that Washington recently passed legislation to strengthen sanctions enforcement and prevent Iranian oil exports to China in particular. “This is unlikely to have an immediate impact. But coupled with previous rhetoric from US lawmakers about attacking Iranian oil infrastructure, these developments are adding to fears of an impact on real supply,” he continued. 

C.M. says that a continued conflict at the current level means the US dollar may stay strong in the short term because the US Federal Reserve is unlikely to cut interest rates soon. However, he adds that if the conflict escalates further, “Investors may become more cautious about taking risks in a volatile market, leading to even more strength for the safe-haven US dollar.” 

He adds that overall, the negative effects on global economic growth would likely be substantial, with economies heavily reliant on oil supplies from the Middle East being hardest hit. 

While the European Central Bank might be relatively less concerned about inflationary pressures due to the region’s fragile economic situation, the possibility of an escalation could impede recovery efforts from the ongoing recession or prolong its duration, he explained. “Europe could encounter heightened challenges, including the risk of financial market disruption,” C.M. continued. 

He notes that the impact on the US economy would be less significant due to its status as a net energy exporter.

Gratowski says that Egypt is likely the country most affected by the attacks in the Red Sea, which have led to declining revenue for the Suez Canal as ships avoid passage through the region. 

He adds that overall, energy flows towards the west have been more affected than in the other direction. “It seems that Houthi attacks have spared Chinese vessels in the Red Sea,” he added.

As the effects of the war and multi-front tensions in the region on the oil market have not been very significant, C.M. says that Middle East-related crises usually follow a pattern in terms of their effects on the energy market. “The crisis in the Middle East follows a familiar pattern: initial fears drive up oil prices, but the impact on the global economy is likely to be short-lived,” he concluded.