Oil prices surged following the surprise attack by Hamas on Israel and Israel’s counterstrike over the weekend. After a knee-jerk reaction upon the open of trading around the world, prices have been well behaved and should abate as the shock of the attack, as deadly as it is, abates.
As long as the conflict remains contained and does not directly involve Iran, the price of oil should ease back toward pre-conflict levels.
It is important to note that oil is not produced in Israel or the Gaza Strip. For this reason, the outbreak of hostilities and its impact on the broader global oil and energy markets should be limited in scope and duration.
The world’s two benchmark oil prices, West Texas Intermediate and Brent, increased by more than 3% early Monday. We expect this spike to be a short-term fluctuation on fears and heightened uncertainties in the Middle East.
As long as the conflict remains contained to Israel and the Gaza Strip and does not involve a direct conflict with Iran and its oil export and refining facilities, the price of oil should ease back toward pre-conflict levels in the coming days and weeks.
For the time being, however, we recommend that middle market companies carefully watch for escalations—especially related to any involvement of Iran—and proceed with caution around any long-term regional investments.
As we monitor the conflict, it is clear that the longer-term implication of the crisis hinges on the involvement of key players, especially Iran and Saudi Arabia.
Read more of RSM’s insights on the energy sector and the middle market.
On Saudi Arabia: It was close to normalizing relations with Israel before the outbreak of violence. Moreover, political alliances in the Middle East have changed rapidly in the past decade. It is not certain how Saudi Arabia will behave given its rivalry with Iran concerning oil production and price setting inside OPEC.
According to The Wall Street Journal just before the conflict, Saudi Arabia was considering an increase in oil production, which would not be in the economic interest of Iran.
If either country becomes involved in the conflict, the repercussions for the oil market could be far-reaching. Iran is especially significant in this scenario given its ties to Hamas and Iran’s control over the Strait of Hormuz. Saudi Arabia’s outsized influence on global oil production by itself puts it in the spotlight during times of global turmoil.
The Strait of Hormuz is an important shipping lane for the global oil and liquified natural gas trade, conveying nearly 17 million barrels of oil and condensates a day. Iran has previously threatened to block the strait during prior crises.
The involvement of Iran would also further complicate the geopolitical landscape, possibly triggering an increased enforcement of sanctions on Iran oil and oil products.
The United States imposed sanctions on Iran in November 2018, but improving Iranian relations with China and others in the region have led to an increase in exports. Increased sanctions on Iran, though, would slow this rise in exports—and tighten the global market.
Market dynamics
To make sense of these events for middle market companies, we view the impact in the context of the oil market.
Before the attack, oil prices had retreated 12% from their high in late September of near $96 per barrel to near $84. This decline has been driven by unseasonably low demand for gasoline, and uncertainties around economic headwinds. These two factors remain largely unchanged so far.
If oil prices recover or even exceed their previous high through this conflict, it is likely to be in the context of larger geopolitical tensions. Still, the economic scenario of $100 oil was contemplated just weeks ago and would not be new.
Saudi Arabia, which has recently stuck with its production cuts of a million barrels per day, could decide to reverse those cuts to temper prices.
We are watching these developments closely to fully understand the longer-term impact on oil markets.
The conflict serves as another reminder, however, that geopolitical risk remains ever present, and that companies must monitor and plan for how they may be exposed to geopolitical disruptions in their own operations, their customers, and their supply chain.
U.S. implications
The price of West Texas Intermediate was trading near $88 per barrel, or up by approximately 4%, soon after the attack, which does not present any real risk to the American economy or the inflation outlook.
Given that the United States is energy independent—the U.S. is near its historic peak in oil production—and that gasoline prices will almost certainly decline despite the continuing volatility, the economic and financial fallout will most likely be quite limited.
A quick look at wholesale gasoline prices in the U.S. implies that despite the spike in oil, gasoline prices are on track to fall nearly 10% in the coming days.
The takeaway
For middle market companies, the takeaway from events in the Middle East is to watch the situation closely but don’t overreact. While short-term market volatility might require adjustments in trading strategies at some companies, at most companies it is important not to needlessly react.
This view has a caveat, however: If the scope of the conflict expands and Iran or Saudi Arabi becomes involved, the energy markets could see a sustained impact on oil prices. In such a scenario, it will be important for companies to consider the economic and financial effects of higher-for-longer oil prices.
Even then, within the context of today’s market dynamics, it does not appear that we have the ingredients of a major oil crisis.
In the end, we do not see this conflict as presenting a major economic, financial or industrial impact on the United States.
