“Israel’s ground invasion of Gaza casts a cloud of uncertainty over the world oil and gas markets, as investors brace themselves for a potentially volatile week ahead.”
Oil and gas markets are bracing for another week of volatility as Israel begins its ground invasion of Gaza. The Middle East, which supplies about a third of the world’s oil, poses a significant risk to crude prices if the conflict escalates to involve other regional powers. Iran, which backs Hamas and other militant groups, has warned that the incursion could prompt action from everyone. Crude prices initially surged above $85 a barrel, but have since remained below $90 as there has been no impact on global supplies. However, concerns about a broader regional conflict continue to raise upside risks to oil prices.
The conflict in the Middle East has already led to weeks of sharp swings in the oil market. Oil-market volatility, which measures the pace of price moves, reached its highest level since June. Increased fighting with Iran-backed Hezbollah in Lebanon and any disruption to the Strait of Hormuz, a crucial crude waterway, could further unsettle traders.
Unlike oil supplies, gas markets have already been affected. Israel shut down the Tamar gas field following Hamas attacks earlier this month. Although production at the nearby Leviathan field has partially offset the shutdown, it highlights the risks to regional supply in both markets. Egypt, which imports gas from Israel, has reported a fall to zero imports.
The threat of further escalation remains, as Iran has threatened further action without providing details. The US also struck sites in Syria, indicating the risk of the world’s largest economy being drawn into the conflict. There have also been warnings to shipping in the Red Sea after missiles were fired from Yemen towards Israel.
Financial markets have been closely monitoring the conflict, with oil at the center of wagers that it could expand beyond Israel and Gaza. Traders have been buying options contracts that would profit from a significant increase in oil prices above $100 a barrel.
Overall, the volatility associated with trading oil contracts has been unforgiving, and there is a significant degree of near-term price asymmetry due to the spreading conflict. The situation in the Middle East will continue to be closely watched by oil and gas markets in the coming weeks.
