Oil continued to fall as Israel accelerated its push into the Gaza strip, without any significant, on-the-ground reports of retaliation by Iran or its proxy forces, easing the concerns of traders that regional supplies of crude oil might be disrupted by the conflict.
After spiking by nearly 3% Friday as Israel stepped up its operations in Gaza, global benchmark Brent dropped below $90 per barrel. American benchmark West Texas Intermediate dropped close to $84 per barrel. Although Israel has deployed its tanks and troops over the border into the northern section of the Gaza Strip in its retaliatory operations launched following the October 7th surprise raid by Hamas militants into Israel, it has progressed slowly, day by day. So far there have no significant actions taken by outside parties which would risk expanding the conflict.
Vandana Hari, founder of consultancy Vanda Insights in Singapore said, “The weekend showed the armed conflict remains limited to Israel and Gaza — in that light, crude looked overbought,” adding the price of crude would, “likely continue sliding until the next risk event.”
The events in Gaza have become the primary focus of the global oil markets, given the potential for the conflict to spread to nearby regions, and result in disruptions of both oil flows by participants, and oil shipments transiting areas such as the Strait of Hormuz, which Iran has previously threatened to blockade under such conditions.
The Middle East accounts for one third of global crude oil supplies, leading traders to fear that any attack which spreads the conflict outside of Israel could produce attacks on oil tankers, blockades of critical shipping chokepoints, and even a reduction of Iranian output, which has proven important in the increasingly tight market.
Prior to the beginning of crude futures trading in Asia on Monday, both Washington and Tehran were warning the conflict was not entirely contained, and could spread. In Washington, US National Security Advisor Jake Sullivan warned that the US saw an “elevated risk” of spillover into other regions. Meanwhile Iran, in a statement said the war could “force everyone to take action.”
Iran is a major backer of Hamas, which both the European Union and the United States have designated as a terrorist group. In southern Lebanon, Iran also supports the militant group Hezbollah, which has positioned forces all along Israel’s northern border. As Israel was preparing to enter Gaza, Hezbollah forces reportedly triggered a pause in the Israeli plans by threatening to immediately open an additional front on the northern border.
Outside of the events in the Middle East, the physical market has been releasing mixed signals as to the supply available. The stockpiles in the US at the key Cushing Oklahoma storage hub are close to the lowest levels seen since 2014. However along the Gulf Coast, there is an unprecedented glut of gasoline, indicating significant demand destruction.
Other market metrics point to a market with slightly higher supplies. The prompt spread for WTI, the difference between the two nearest contracts, was 75 cents in backwardation. Although still a bullish indicator, it is near lows which were seen last week, and it is less than was seen prior to the eruption of the conflict in Israel.
In addition, Bloomberg released a survey which said that for the first time in six months, Saudi Arabia will likely not increase the price for its flagship oil blend for its customers in Asia due to the margins for refineries across the region weakening.
