Hamas Attack on Israel Has Limited Direct Impact on Oil Markets

The Hamas attack against Israel over the weekend should ultimately not be material for oil markets, in our view. Gaza produces no oil, while Israel produces only a small amount for its own use. However, oil prices were up as much as 5% at one point before retreating, as we think investors are concerned the conflict could destabilize the wider Middle Eastern region, which serves as a transit point for nearly one in every five barrels produced globally.

The biggest risk is whether Israel chooses to retaliate against Iran, a known sponsor of Hamas whose senior officials worked with Hamas to plan the attack, per the Wall Street Journal. Iran produced about 3 million barrels per day of oil in July 2023. The vast majority of Iranian oil exports end up in China, in our view. We see an Israeli offensive against Iran as unlikely, as it would represent a significant escalation over prior Israel-Palestine conflicts.

On the other hand, this conflict could provide a pretext for the United States to harden its sanctions against Iran. These sanctions had recently been informally relaxed, allowing Iranian oil production to increase materially, in order to help offset withheld supply from Saudi Arabia and Russia. U.S. officials have yet to confirm any Iranian connection to the attacks.

However, even in this more dire scenario, oil markets have more leverage to respond than in the past. Saudi Arabia and Russia’s 1.3 million barrels per day of temporary cuts can be unwound relatively quickly. In addition, the costs of higher interest rates (Treasury bills hit some of their highest levels in decades last week) have sparked concerns about slowing global growth and therefore slowing oil demand.