Investors are braced for a jump in oil prices after Israel declared war on Hamas, sparking fears of a “spiralling” crisis across the Middle East.
Analysts warned the price of Brent crude could jump by 5pc when trading begins on Monday, amid fears about future supply.
Although Israel is not itself an oil exporter, the conflict will have repercussions across the region.
It has echoes of the Yom Kippur War in 1973, which led to the Arab oil embargo. Opec members punished the US’s support of Israel in the conflict by blocking exports, sending fuel prices soaring and sparking an inflation crisis.
Experts do not expect a similar response this time, with Opec leader Saudi Arabia now far closer to Washington.
Asked how Opec would respond to the situation in Israel on Sunday, United Arab Emirates energy minister Suhail al Mazrouei said: “We do not engage in politics; we govern by supply and demand, and we do not consider what each country has done.”
However, there are concerns that the war could disrupt oil exports from Iran. The Gulf state has supported the terror group Hamas and has openly praised its attack on Israel.
Ole Hansen, head of commodity strategy at Saxo Bank, said: “What the market thinks will be potentially the biggest risk will obviously be supplies from places like Iran.”
While Iran has faced sanctions on its oil industry since 2018, enforcement has softened under President Joe Biden amid improving relations between Washington and Tehran.
Mr Hansen said the conflict risked inflaming tensions between the two countries. President Joe Biden has pledged “rock solid” support for Israel.
Mr Hansen said: “Right now, supply is not in danger but the market is worried and market worries can quite often drive markets more than the actual fundamentals.”
He predicted that oil prices could jump by around $5 a barrel when trading begins. The price of Brent crude was just under $85 on Friday.
Bjarne Schieldrop, chief commodities analyst at SEB bank, said: “There will always be concerns that this will create some spiralling effects in the Middle East.”
Any restriction on Iranian exports would impact prices given supplies are already tight. Russia and Saudi Arabia have been curtailing oil exports this year in a bid to prop up prices, with cuts now extended until the end of this year.
Exports from Iran had been helping to meet this shortfall. The country has this year increased production by 410,000 barrels per day.
Mr Hansen said: “One of the biggest export increases we have seen this year has come from Iran, together with US shale, and if the finger gets pointed against Iran we could potentially see tightening sanctions against Iran and that could potentially tighten up the market.”
A price increase to $90 a barrel would only take oil back to where it was last week. The price of Brent crude has declined by 12pc since hitting a peak of more than $96 at the end of September, amid signs that economies around the world were slowing.
However, a sustained rally for oil prices threatens to prolong the battle against inflation in the West.
If oil prices were to reach $95 per barrel by the end of the year, it would add 0.4 percentage points to global inflation next year, according to estimates from Capital Economics. Oil price rises typically take four weeks to flow into higher petrol pump prices.
Mr Schieldrop said oil prices could jump as high as $87 this week.
He said: “We had a very, very big sell off in late September, so the market is primed for a bullish reaction. It could be stronger just because of the big sell off that we have behind us.
“It’s a long way from this [conflict] to supply disruptions, unless suddenly this war spirals into total chaos engulfing the Middle East. That would be a big surprise and it’s not our main scenario at all.
“But you never know. It’s always, always uncomfortable when these kinds of things start happening in the Middle East.”
Stock markets across the Middle East fell on Sunday. Israel’s TA-35 index slumped by 6.4pc, its biggest loss in more than three years. Saudi Arabia’s Tadawul All Share Index fell by 1.6pc.
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