Last week, oil traders decided to reduce the risk premium that had been factored into prices since the beginning of the year. However, there is increasing worry about the likelihood of an Israeli invasion of Rafah in Gaza, which is causing oil prices to become more volatile on Monday.
According to Rob Thummel, a senior portfolio manager at Tortoise, an event in Rafah would not cause any disruptions in the physical oil market. Nevertheless, the heightened uncertainty surrounding potential retaliatory measures from Iran may be reintroducing a geopolitical risk premium to oil prices. Iran has a close relationship with the Palestinian military organization Hamas, which currently holds control over the Gaza Strip. Recently, there was a tragic attack launched by Hamas on southern Israel on Oct. 7.
Last week, oil prices experienced a decline, as U.S. benchmark West Texas Intermediate crude futures dropped by 6.9% and global benchmark Brent decreased by 6%. This was due to the optimism surrounding a potential cease-fire between Israel and Hamas, which reduced concerns about oil supply disruptions in the Middle East.
Prices on Monday, though, ended the day with a small increase following a momentary decline.
There were reports indicating that cease-fire talks had reached a conclusion, but Monday afternoon’s news reports stated that Hamas has agreed to an Egyptian-Qatari proposal to halt its war with Israel in Gaza. Israel did not provide an immediate response, though.
Earlier, the Israeli military issued a warning to civilians in eastern Rafah, urging them to evacuate due to mounting expectations of a possible invasion.
Yesterday, the price of Brent crude for July delivery settled at $83.33 a barrel on ICE Futures Europe, increasing by 37 cents, or nearly 0.5%. Similarly, June WTI crude climbed by 37 cents, or 0.5%, to $78.48 on the New York Mercantile Exchange after trading as low as $77.91.
The price action remained relatively subdued, with concerns arising over the potential escalation of attacks on oil tankers in the Red Sea by Iran-backed Houthi rebels, according to Anas Alhajji, an independent energy expert and managing partner at Energy Outlook Advisors.
According to a report from Reuters, in late April, the Houthis claimed responsibility for a drone attack on a container ship in the Indian Ocean, which links to the Red Sea. They stated that this action was in support of Palestinians against Israel’s military operations in Gaza.
According to Alhajji, the future of oil is contingent upon the response of the Houthis and any potential developments in other nations, in light of the events in Rafah. Without such responses, any increases, if they occur, are brief.
The ongoing conflict between Israel and Hamas may also have implications for the potential agreement between Saudi Arabia and Israel to establish normalized relations.
According to a report from The Wall Street Journal in mid-April, the Biden administration has advised Israel against initiating a large-scale ground operation in Rafah. The concern is that such a move would not only cause harm to civilians but also lead to increased isolation for Israel in the international community, especially among Arab nations. This advice comes at a sensitive time as discussions regarding normalization and postwar arrangements for Gaza are underway.
According to the report, the Biden administration has made efforts to facilitate a potential agreement between Saudi Arabia and Israel. They have urged Israeli Prime Minister Benjamin Netanyahu to consider endorsing Palestinian statehood as a condition for receiving diplomatic recognition from Riyadh. In the latest development, the White House has proposed a closer defense partnership with Saudi Arabia.
Saudi officials maintain their stance that Israel normalization is still a possibility, but they emphasize the importance of a credible path to a Palestinian state and an end to the war, according to Helima Croft, head of global commodity strategy and MENA research at RBC Capital Markets.
According to her, the issue is framed as a question of Israel’s preference between Rafah and Riyadh.
According to Croft, the current situation makes it difficult to envision any progress towards normalization. Netanyahu’s suggestion of an imminent Rafah offensive and his lack of willingness to reopen discussions on Palestinian statehood provide no hope for a resolution.
According to Croft, it was implied last autumn that Riyadh would be more open to production requests from Washington if the Saudi-Israel deal to normalize relations was concluded. Although energy assistance was not explicitly discussed as part of the negotiations, this assumption was made.
That is especially crucial for the U.S., given the upcoming presidential elections later this year.
State-owned oil company Saudi Arabian Oil Co., also known as Aramco, increased the price of certain crude grades for Asian customers and all grades for customers in northwest Europe and the Mediterranean. However, there was no change in price for customers in the U.S.
According to analysts, the recent increase in prices indicates that the Saudis are not worried about a potential decrease in oil demand. This likely played a role in the rise of oil prices on Monday.
According to Angie Gildea, the U.S. Energy Leader at KPMG, oil prices will be influenced by the changing geopolitical situation to some extent.
Nevertheless, according to the expert, as long as there are no unexpected disruptions in supply or major trade routes, it is generally believed that there is sufficient spare capacity to prevent prices from remaining excessively high for an extended period of time.
