Fears of Middle East Supply Disruptions Drive Oil Prices Higher

Oil prices surged by 4% on Monday due to concerns over the escalating conflict between Israel and Gaza and its potential impact on oil output in the Middle East. The benchmark for US oil, West Texas Intermediate (WTI), rose to over $86 a barrel, while the price of Brent crude also experienced a significant increase in early Asian trading. Although Israel and the Palestinian territories do not produce oil, the Middle East region accounts for nearly a third of global oil supply. The recent wave of attacks by Hamas has been the most significant escalation between the two sides in decades. Western nations have condemned the attacks, but Hamas claims to have received direct support from Iran. Iran, however, denied involvement in the attacks at a UN Security Council meeting, although President Ebrahim Raisi expressed support for the actions. There are increasing concerns that the conflict could lead to a wider conflagration, potentially affecting major oil-producing nations such as Iran and Saudi Arabia. Energy analyst Saul Kavonic warned that if Iran becomes engulfed in the conflict, up to 3% of global oil supply could be at risk. The Strait of Hormuz, a vital oil trading route, would also be disrupted, holding around a fifth of global supply hostage. The uncertainty surrounding the situation has led to a shift in investments towards US Treasury bonds and the dollar, as investors typically seek safer options during times of crisis. Following Russia's invasion of Ukraine in 2022, oil prices soared to over $120 a barrel in June of that year. While they fell back to just above $70 a barrel in May 2023, they have been steadily increasing as producers implement output cuts to stabilize the market. Major oil producer Saudi Arabia has announced cuts of a million barrels per day in July, and other OPEC+ members have also agreed to continued production cuts in an effort to support oil prices. OPEC+ accounts for approximately 40% of the world's crude oil, making their decisions significant in influencing oil prices.