Havoc in energy markets from war in Gaza unlikely, analysts say

Oil prices could shoot up to more than $150 per barrel if Israel’s war in Gaza worsens and disrupts large volumes of oil supply around the region, the World Bank has warned, but for now analysts view that as an unlikely scenario.

Israel’s bombing of Gaza, now entering its fifth week, has killed more than 10,000 Palestinian civilians. Pressure is mounting for some sort of “humanitarian pause,” if not a ceasefire, in order to deliver aid to the more than 2 million Palestinians suffering from a lack of food, water, shelter, and medicine. Israel insists it will continue its war to destroy Hamas in response to the group’s October 7 attack that killed more than 1,400 Israelis.

For now, the oil and gas price movements have been muted with only minor impacts to physical energy flows. Chevron quickly shut down its offshore gas platform at its Tamar field in the Eastern Mediterranean after the conflict exploded, a move that has interrupted gas shipments to Egypt, which may, in turn, disrupt LNG exports on to Europe. Egypt has resorted to importing an LNG cargo, the first time it has done so in months.

But those volumes are not significant in global terms. Despite the carnage in Gaza, oil prices have declined modestly over the past month, a reflection that markets do not fear a major supply disruption, at least not yet.

The much larger risks for energy markets are that the war could spread throughout the region.

“There’s a lot of ways this conflict could expand, given all the actors involved,” Gregory Brew, an analyst at the New York-based political risk firm Eurasia Group, told Gas Outlook. “The good news is that, so far, major actors have consistently signaled that they don’t want to escalate.”

He said that Iran “hasn’t gotten involved, apart from the little attacks we’ve seen from Iran’s allies in Syria and Iraq, plus a few missiles from the Houthis” in Yemen.

He also pointed to a highly anticipated speech on November 3 by Hezbollah leader Hassan Nasrallah, which many feared would mark the beginning of an escalation of violence on the Israeli-Lebanon border. Any explosive conflict between Hezbollah and Israel would risk drawing in Iran, the group’s main backer. Ultimately, however, Nasrallah’s speech was somewhat measured, vowing to keep up pressure on Israel, but stopping short of entering into full-scale war.

“Nasrallah’s speech today made it pretty clear that Hezbollah isn’t ready to dive into battle with Israel on behalf of Hamas,” Brew said.

But the risks are far from over. The World Bank warned that a wider war could send energy prices soaring. In its October Commodity Markets Outlook, the Bank’s baseline scenario, which does not assume a substantial impact on energy markets from the war in Gaza, has Brent crude prices averaging $84 per barrel in 2023, before dipping slightly to $81 per barrel next year.

However, the World Bank offered three scenarios, ranging in severity, in which oil markets could suffer significant supply disruptions. The first possibility would be the most modest, with a supply disruption of 0.5 to 2 million barrels per day (Mb/d), which would push prices up by $3 to $12 per barrel. This would be on par with the impacts seen during the 2011 civil war in Libya.

The second scenario would be an impact of 3 to 5 Mb/d, which would send oil prices up by $19 to $31 per barrel above the baseline. The World Bank said this would be akin to the 2003 war in Iraq.

Finally, in the Bank’s most severe scenario, roughly 6 to 8 Mb/d of oil supply could be knocked offline, roughly equivalent to the proportion of supply disrupted during the 1973 Arab oil embargo. If that were to occur, prices could shoot above $150 per barrel.

“The latest conflict in the Middle East comes on the heels of the biggest shock to commodity markets since the 1970s—Russia’s war with Ukraine,” warned Indermit Gill, the World Bank’s Chief Economist and Senior Vice President for Development Economics. “If the conflict were to escalate, the global economy would face a dual energy shock for the first time in decades—not just from the war in Ukraine but also from the Middle East.”

Escalation still unlikely

Fernando Ferreira, the director of Geopolitical Risk Service at the Washington-based research firm Rapidan Energy Group, said that the World Bank’s numbers “seemed reasonable,” but added that a “worst-case” scenario would probably be much worse than the 6 to 8 Mb/d of supply disruptions laid out in the Bank’s report.

“I think a worst-case scenario is a shutdown of all traffic through the Strait of Hormuz for an extended period of time,” Ferreira said. A blockage of the Strait could impact some or all of the 20 Mb/d of oil that flows through the chokepoint, a volume that would be double what the World Bank considered.

But, he noted, the odds of that unfolding are not exactly high.

“We don’t think a regional escalation is likely, but I think that we could very well see a resumption of attacks on commercial traffic, whether it is the Houthis in the Red Sea or proxies in Iraq or even Yemen, attacking Hormuz — I think that is very much in the cards. That might still drive the price a little bit higher,” Ferreira said.

The same risks apply to the gas sector — Qatar sends its LNG through the strait, accounting for 20 percent of the global total.

Another “nightmare scenario” might be an attack on Saudi oil infrastructure similar to the 2019 attacks on Abqaiq, a critical Saudi oil processing facility that sent shockwaves through oil markets at the time. But Ferreira said that relations between Iran and Saudi Arabia are not as tense as they used to be. “That seems a lot less likely today. 2023 is not 2019,” he said.

A more realistic danger is the risk of “miscalculation” or “accidents,” Ferreira said. Hypothetically, the Houthis or Hezbollah or an Iranian-backed group in Iraq could pull off a “lucky strike” that causes unexpectedly large damage or inflicts mass casualties in Israel, prompting an intense reaction that sees Israel attacking one of those groups, or even Iran.

For now, at least, the prospects of such a calamity appear remote.

Meanwhile, there is growing international pressure on both Israel and the United States for some sort of a ceasefire. President Biden is under growing domestic pressure to exert leverage on the Israeli government to halt the horrific rate of civilian death in Gaza. Illinois Senator Dick Durbin became the first U.S. Senator to call for a ceasefire last week, and the pressure on the White House will only grow as the violence continues.

Ferreira said there’s probably a “window of time” for Israel to continue its ground invasion and airstrikes before the international pressure becomes too much. “I think that there’s a limited window of time for [Israel] to do that and maybe we’re approaching that end of the window of time,” he said.

But he cautioned that even if there is a halt in hostilities, it may look more like a pause for humanitarian aid rather than a “sustainable ceasefire.”