Gaza/oil: rates threat limits scope for price leaps

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Middle Eastern conflicts and oil make for a combustible mix. Yet Hamas’s brutal attack on Israel this weekend ignited no conflagration in the crude oil market. On Monday, Brent’s price rose just 3 per cent to $87.

There are two reasons. Traders are downplaying the risk that the conflict will have a big regional impact, drawing in oil producer Iran. Hamas is believed to have received support from that quarter.

Moreover, investors do not believe oil can roar significantly higher, even if Iranian supplies are disrupted. That view takes account of the hawkish stance of the world’s central bankers.

Iran is the number four Opec producer. It generated 3mn barrels per day in July, the highest level since late 2018, according to the cartel’s data. About 80 per cent of Iranian oil exports end up in China, believes Richard Bronze at Energy Aspects.

The US would struggle to impose successful sanctions on China’s small “teapot” refineries. They buy up Iran’s discounted crude but have little contact with the US financial system. If Israel interrupted Iran’s oil exports militarily, it would knock out about 3 per cent of world crude supply.

Supplies of the black gold have withered this year amid a 1.3mn barrel per day Saudi Arabian production cut.

Threats to world oil supply would inflame fears of embedded inflation in the minds of hawkish central bankers. They might, therefore, keep rates higher for longer.

Macroeconomic factors would then temper any panic in the world’s commodity markets. Prices might breach the oft-mooted $100 per barrel price ceiling, but it would most likely be a temporary phenomenon.

Consider that in the US, the world’s largest consumer, petrol inventories have swelled well over 10-year averages just since July. Petrol prices did not fall in line with crude oil’s upward shift during that time. Bulls will counter that special issues arose, but that still hints at weakening demand.

That would keep a lid on prices for oil businesses. Normally purchase-shy ExxonMobil has, therefore, teed up one $4.9bn US deal this year, Denbury Resources. It is linked with a larger offer for Pioneer Natural Resources.

Fighting in Gaza and on its borders will have a big impact on Middle Eastern politics. As matters currently stand, the oil industry remains no more than a bystander.