Crude Oil Futures and the Israel-Hamas Conflict

by Warren Seah

Oil futures are under close scrutiny as Western diplomats and leaders issue warnings to Iran regarding its involvement in the Israel-Hamas conflict. With Israeli forces on the brink of a ground invasion of Gaza, the energy markets are serving as an indicator of broader market sentiment this week. Crude oil and natural gas are leading investors to trade volatility options and pursue classic hedges such as gold and Treasuries, according to Chris Weston, head of research at Melbourne-based broker Pepperstone.

On Sunday night, crude oil saw a slight decline, with West Texas Intermediate crude futures falling by 30 cents, or 0.3%, to $87.39 a barrel on the New York Mercantile Exchange.

Iran’s stance on the conflict has also drawn attention. Axios reported that Iran had sent a message to Israel expressing its desire to avoid further escalation but warning that intervention might become necessary if the Israeli operation in Gaza persisted. Iran’s foreign minister emphasized the possibility of escalation and claimed that other parties in the region were prepared to take action.

With concerns about a potential second front arising from attacks by Hezbollah, Israel’s military declared the closure of its northern border with Lebanon. This move has sparked fears that the Iran-backed group could join the conflict. White House National Security Adviser Jake Sullivan acknowledged the risk of escalation and Iran’s involvement, highlighting President Joe Biden’s swift deployment of naval forces, including aircraft carriers, to the eastern Mediterranean and the Persian Gulf as a deterrent measure.

French President Emmanuel Macron also weighed in on the situation, warning Iranian President Ebrahim Raisi during a Sunday phone call against any escalation in the Israel-Hamas conflict.

Overall, due to ongoing geopolitical tensions and potential risks associated with the Israel-Hamas conflict, the energy markets remain highly influential in driving market sentiment and trading activity this week.

The President’s Warning

French President Emmanuel Macron’s office issued a warning to Iranian President Ebrahim Raisi regarding the current conflict. The statement emphasized the importance of avoiding any further escalation, particularly into Lebanon, given Iran’s connections with groups such as Hezbollah and Hamas. It stressed that Tehran has a responsibility to prevent a regional crisis and should take all necessary measures to do so.

Oil Prices Rise Amidst Concerns

Oil prices experienced a sharp increase on Friday, as traders were hesitant to maintain short positions heading into the weekend. Both West Texas Intermediate (WTI) crude and Brent crude, the global benchmark, saw a nearly 6% surge during Friday’s trading session.

The spike in oil prices can be attributed to fears that the ongoing Israel-Hamas conflict might escalate and potentially involve Iran, thereby posing a threat to oil supplies from the Middle East. After an initial spike earlier in the week, which was largely erased in subsequent sessions, traders began rebuilding a risk premium.

Support for the oil rally was further bolstered by the commitment of G-7 nations to enhance sanctions on Russian oil exports, as highlighted by Stephen Innes, managing partner at SPI Asset Management.

Impact on Financial Markets

Concerns over escalation in the region had a negative impact on the stock market, although there were some positive developments. The Dow Jones Industrial Average broke a streak of three consecutive weekly losses, while the S&P 500 scored a second straight weekly gain. However, long-dated Treasury yields fell as investors sought the safety of government debt, partially reversing the significant increase in yields that had been affecting the stock market since late July.

Potential Risks for LNG Market and Iran’s Role

There exists a bear case for risk, primarily if there is a substantial rally in European natural gas and crude oil prices. In such a scenario, the market could increase the probability of Iran disrupting the movement of liquefied natural gas (LNG) through the Strait of Hormuz, particularly impacting Qatar LNG supply, which accounts for 20% of the global LNG market. However, the likelihood of this occurring is currently considered low, depending on Iran’s ongoing involvement and any new sanctions imposed on them.

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