- It has been nearly four weeks since Israel declared war on Hamas, and as the conflict in Gaza enters its second phase, fears of spillover into the wider Middle East region are also growing.
- Market watchers are keeping an eye on the Strait of Hormuz, the world’s main oil transport chokepoint, to assess any potential impact.
Shown are tankers in the Strait of Hormuz – a strategically important waterway that separates Iran, Oman and the United Arab Emirates.
ATTA KENARE | AFP | Getty Images
It has been nearly four weeks since Israel declared war on the Palestinian militant group Hamas, and as the conflict in Gaza enters its second phase, fears of spillover into the wider Middle East region are also growing.
Market watchers are keeping an eye on the Strait of Hormuz – the world’s main chokepoint for oil transport – to see if there could be any potential impact.
According to the Energy Information Administration, the strait that lies between Oman and Iran is a major canal through which about a fifth of the world’s oil production flows each day. It is a strategically important waterway that connects crude oil producers in the Middle East with key markets around the world.
On October 7, Hamas militants launched a multi-pronged attack by land, sea and air and infiltrated Israel, killing more than 1,400 people. In retaliation, Israel launched airstrikes and a ground invasion of the Gaza Strip, killing more than 9,000 people in the enclave so far.
There is still a risk that this could develop into a larger conflict. The US has sent military assets to the region to support Israel, which is fending off barrages of rockets from Iranian-backed militants in neighboring Lebanon and Syria.
The US has also carried out airstrikes against targets linked to the Iranian Revolutionary Guard in Syria.
Israel’s retaliation against Iran risks closing the strait and pushing oil prices above $250 a barrel, according to a recent note from Bank of America. Iran is a major oil producer, and its proxies include Hamas and Hezbollah, militant organizations based in Gaza and Lebanon, respectively, with the stated goal of destroying Israel.
Observers fear that Israel’s intense bombardment of the Gaza Strip will prompt more of its opponents to attack from new fronts, which could lead to a spillover into the wider Middle East region.
However, some industry observers believe a closure is unlikely.
“The likelihood of a supply disruption, particularly the closure of the Strait of Hormuz, is low,” said Andy Lipow, president of Lipow Oil Associates. He said oil producers such as Saudi Arabia, Iran, Iraq and Kuwait still rely on the revenue that comes with access to the strait.
Goldman Sachs shared the same opinion.
Analysts led by Daan Struyven, head of oil research, said in an Oct. 26 note that a “severe supply contraction scenario” as a result of a disruption to trade through the Strait of Hormuz was unlikely to materialize.
Iranian President Ebrahim Raisi spoke on Sunday said on the social media platform Xformerly known as Twitter that Israel “has crossed the red lines, which could force anyone to take action.”
Foreign ministers from Arab nations – including the United Arab Emirates, Jordan, Bahrain, Qatar, Kuwait, Saudi Arabia, Oman, Egypt and Morocco – condemned Israeli forces’ targeting of civilians and violations of international law in Gaza. Israel says it does not target civilians, only terrorist targets.
In 2019, Iran repeatedly threatened to cut off oil shipments through the Strait of Hormuz after former US President Donald Trump withdrew from the landmark 2015 nuclear deal and to restore sanctions on the Islamic country. According to the US Navy, Iran has attacked or disrupted 15 international-flagged merchant ships in the last two years alone.
On Monday, the World Bank forecast that oil prices could rise to $157 a barrel if the ongoing conflict escalates further.
The World Bank warned of a repeat of the 1973 Arab oil embargo, when Arab energy ministers imposed an embargo on oil exports against the United States in retaliation for Israel’s support in the 1973 Arab-Israeli War.
In such a scenario, a “major disruption” could occur, “which would initially drive prices up by 56% to 75% – to $140 to $157 per barrel,” the report said.
Lipow said such a scenario is unlikely to occur.
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Oil prices since the beginning of the year
“Times are very different today than they were 50 years ago because there are these countries in the Middle East that just need this [oil] revenue,” he said.
However, Lipow pointed out that Iran “waged the war through its proxies.”
“One of my fears is that one of these proxies may make a very serious mistake if they attack Israel,” he added. If that happens, the analyst said, Israel will likely retaliate and “go directly to Iran’s jugular,” which would very quickly lead to a regional conflict.