Oil prices soar as Hamas attack on Israel fans Middle East tensions

Singapore – Oil soared as much as 5 per cent after

Hamas’ surprise attack on Israel

over the weekend, the broadest and bloodiest in decades, threatened to inflame tensions in the Middle East.

Brent crude surged US$4.24, or 5 per cent, to US$88.82 a barrel by 10am Singapore time as a war-risk premium returned to markets, while US West Texas Intermediate (WTI) rallied US$4.26, or 5.1 per cent, to US$87.05.

At 4.55pm, the price surge had eased and Brent was trading up 2.7 per cent at US$86.83, while WTI was 2.9 per cent higher at US$85.20.

Palestinian Islamist group Hamas on Saturday launched the largest military assault on Israel in decades, killing hundreds of Israelis and triggering a wave of retaliatory Israeli air strikes on the Gaza Strip. The combined death toll topped 1,100 as fighting headed into a third day, while the United States said it was sending warships to the region.

The latest events in Israel do not pose an immediate threat to oil supply, but traders fear an escalation of the violence – contained in the Middle East for now – could spiral into a more devastating proxy war embroiling the US and Iran.

Any retaliation against Teheran amid reports it was involved in the attacks could endanger the passage of vessels through the Strait of Hormuz, a vital conduit that Iran has previously threatened to close.

WTI and global benchmark Brent futures had plummeted in October – dropping by around US$10 a barrel before the attack on Israel – as worries about high interest rates and slowing growth clouded the demand outlook. Those fears overshadowed bullishness that spurred a sharp rally in the third quarter as physical balances tightened due to prolonged Saudi-led crude output cuts.

The Israel-Hamas war reduces expectations that Saudi Arabia will cut or eliminate its output curbs of one million barrels a day, Citigroup analysts said in a note. Risks are also growing that Israel will attack Iran, they said.

The eruption of violence threatens to derail US efforts to broker a rapprochement between Saudi Arabia and Israel, in which the kingdom would normalise ties with Israel in return for a defence deal between Washington and Riyadh. Saudi officials had reportedly told the White House on Friday that they were willing to raise output in 2024 as part of the proposed Israel deal.

An increase in Saudi output would have helped to relieve supply tightness after months of supply cuts from key producers Saudi Arabia and Russia.

The attacks also come after months of easing tension between Washington and Teheran, with crude shipments from Iran rebounding to a five-year high with America’s tacit blessing. In an extreme scenario, Iran could retaliate and take aim at the Strait of Hormuz. The waterway is essential for the movement of nearly 17 million barrels of crude and condensate each day.

“If Israel comes out and directly implicates Iran, we believe it will likely be difficult for the Biden administration to continue to adopt such a permissive sanctions regime,” RBC Capital Markets analysts said in a note. “We anticipate that critics in Congress and elsewhere will contend that the White House is providing Iran with the financial wherewithal to sponsor such malign actors.” BLOOMBERG, REUTERS