Oil Prices Rally After Hamas Attack Alters Geopolitical Risk Premium

• Oil prices soared in the aftermath of Hamas’ attack on Israel, with WTI climbing by 3.68% and Brent up 3.42%.
• The attack by Hamas will likely undermine efforts to normalize relations between Israel and Saudi Arabia.
• So far, the oil price movement has been driven by increased geopolitical risk rather than any tangible impact on supply.

Oil prices jumped by nearly 4% early on Monday after the weekend attack by Hamas on Israel rekindled tensions in the Middle East.

The two major crude oil benchmarks were up by nearly 4% as of 8.40 a.m. EST, with Brent Crude up 3.42% at $87.50, and WTI Crude rising by 3.68% to $86.00.

Oil prices recouped on Monday some of last week’s losses, which had accumulated amid concerns about demand and economies with higher-for-longer interest rates.

The Saturday attack by Hamas on Israel and Israel’s declaration of war on Hamas reignited the always-simmering tensions in the Middle East, which had just seen a rapprochement in the relations between some Arab states and Israel. Before the attack, the U.S. was also negotiating the normalization of the relations between Israel and Saudi Arabia.

“The situation is tense and with some calling this Israel’s 9/11 moment, the risk of an escalation is still high as Israel and potentially also the US responds,” Ole Hansen, Head of Commodity Strategy at Saxo Bank, said on Monday.

With no impact on oil supply, the first response on the market has been driven by traders “adding a geopolitical risk premium back in the price and fresh demand following last week’s strong correction which drove a significant amount of long liquidation, especially in Brent,” Hansen added.

All eyes will be on whether Israel will point the finger at Iran for the Hamas attack and a potential response, the strategist noted. 

Iran has raised its oil production and exports in recent months, as the U.S. hasn’t enforced the sanctions as strictly as before.

“Should the spotlight turn towards Iran, there's a possibility of stricter sanctions being imposed, potentially leading to supply constraints and tightening conditions within the market,” Hansen said.

According to Kelvin Wong, senior market analyst at OANDA,

“Given that Israel is a strategic stakeholder in international relations within the Middle East region, a further escalation of the current armed conflict may see a rise in oil price supply disruptions which tends to be used as a “choice strategic weapon” for potential bargaining chips among the stakeholders that are involved in the conflict.”  

By Charles Kennedy for Oilprice.com

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