Israel-Hamas war: Capital Economics outlines three oil supply risks

As the renewed fighting between Hamas and Israel continues, London-based Capital Economics has highlighted three specific risks to regional oil supply going forward. 

“The upshot is that the longer the conflict goes on or the more widespread it becomes, the greater these risks will be,” a commodities economist at the firm, Edward Gardner, said in a note.

Brent crude, the international oil price benchmark, jumped from about $84 per barrel at the end of Friday to above $87pb on the news that Hamas militants launched an attack on Israel on Saturday. 

However, the increase has not been enough to reverse the plunge in the price over the past week, Gardner said.

He said oil prices have risen not because of 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,” he said.

The first of three oil supply risks relates to Iran’s output, which has risen strongly this year, according to Capital Economics.

It said Iran’s production has been benefitting from the country’s increasingly close relationship with China and their growing bilateral trade. 

“But there has also been speculation that the US is turning a blind eye to Iran’s oil exports to keep prices down. If the US were to judge that Iran is involved in Hamas’ attack, this could lead it to ‘turn the screws’ on Iran’s oil exports by enforcing sanctions more strictly,” it said.

The economic research firm said the second risk is that the conflict will make it harder (if not impossible for now) for Saudi Arabia and Israel to normalise relations. 

“Recently, it had been looking like a Saudi-Israel peace deal, brokered by the US, was on the cards. As part of that, Saudi Arabia had indicated that it would be willing to boost oil supply next year. (Saudi Arabia and OPEC+ currently plan to limit oil supply through to the end of 2024.),” it said.

The third risk, and perhaps of most concern from a humanitarian point of view, is that the conflict could expand and other actors could become embroiled, disrupting regional oil supply, according to Capital Economics. 

The Middle East accounted for around a third of global oil supply last year and a lot of that passed through the Strait of Hormuz, it said.

“The fact that the Brent crude oil price has ‘only’ risen by about 4 percent so far today is arguably because so many of these supply risks are still just that – risks. We had already been forecasting the global oil market to be in a 1.2m bpd deficit in the second half of this year due to strong demand and OPEC+ supply cuts, followed by a finely balanced market in 2024. If these supply risks were to materialise, then we would have to consider raising our forecast for the Brent crude price, which is for $85pb by end-2024,” it added.