Oil prices are falling even as Israel steps up its war on Hamas. A spike could still happen

Oil prices fell again Monday as concerns about the health of the global economy outweighed fears that Israel’s move on the weekend to expand its military operations in Gaza could lead to a regional conflict.

Brent crude, the global oil benchmark, fell 1.2% to $89 a barrel, and West Texas Intermediate (WTI) crude, the US benchmark, dropped 1.3% to trade at $84 a barrel by 6.50 a.m. ET. Last week, Brent fell 1.8% and WTI 3.6%.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, wrote in a note Monday that, while “the risks of regional escalation are still clear and present,” the ground offensive in Gaza had been “widely expected.”

“Although supply concerns are still hanging around, keeping a floor on oil prices, concerns about a drag on (global) growth ahead leading to weaker demand have prompted a fall in oil prices,” she said.

Concerns about global economic growth were underscored Monday when Germany — Europe’s biggest economy — reported that its gross domestic product shrank in the third quarter as consumers reined in spending.

The World Bank said Monday that a ratcheting up in the fighting in Gaza could push global commodity markets, including oil markets, into “uncharted waters,” and laid out three scenarios under which oil prices could surge.

“Policymakers will need to be vigilant,” Indermit Gill, the lender’s chief economist, said in a statement. “If the conflict were to escalate, the global economy would face a dual energy shock for the first time in decades — not just from the war in Ukraine, but also from the Middle East.”

The World Bank, in its Commodity Markets Outlook published Monday, said it expected global oil prices to average $90 a barrel in the fourth quarter, before dropping to an average of $81 a barrel over next year as global economic growth slowed.

If, however, the conflict were to escalate and disrupt oil supplies, prices could shoot up by as much as 75% to $157 a barrel under the bank’s worst-case-scenario. In that instance, the level of disruption would be comparable to that caused by the Arab oil embargo in 1973.

Prices for Brent have risen 5.7% since Hamas attacked Israel on October 7, killing more than 1,400 people, mostly civilians.

Tensions in the region have risen since Saturday after Israeli troops intensified their ground operation in Gaza, following weeks of aerial strikes on the Hamas-controlled territory. Israeli Prime Minister Benjamin Netanyahu said Sunday that the country was prepared for a “long and difficult war.”

Jake Sullivan, US national security adviser, told CBS Sunday that there was an “elevated risk” of the conflict “spreading to other parts of the region.”

Iranian President Ebrahim Raisi also said Sunday that Israel’s offensive had “crossed the red lines” and that it “may force everyone to take action.” Iran is a key player in the region, and is allied to Hamas as well as Hezbollah, a Lebanese militant group that has been involved in tit-for-tat exchanges of fire with Israel in recent weeks.

Iran has denied any involvement in the October 7 assault by Hamas in Israel. Initial US intelligence suggests that Tehran had been surprised by the attacks.