In recent days, the world has been witness to alarming attacks in Israel, causing widespread concern about their potential repercussions on the oil market. These attacks, perpetrated by Hamas, led to a dramatic and sudden escalation of instability in the Middle East. The conflict between Israel and Hamas, which erupted over the weekend, has tragically claimed the lives of more than 1,100 individuals. In response to these distressing developments, U.S. futures experienced a substantial surge, with prices surging by as much as 5.4% in New York, briefly surpassing the $87 per barrel mark.

oil rallied then faded

At this preliminary stage, it is imperative to emphasize that there has been no immediate effect on current global oil production. Consequently, there is a low likelihood of any significant immediate impact on the near-term supply-demand balance or oil inventories, which are pivotal determinants of oil prices. Although Israel’s role in the global oil supply chain is marginal, the ongoing conflict does raise concerns about the potential involvement of the United States and Iran. This year, Iran has emerged as a significant contributor to global crude oil supply, offering relief to tightening oil markets. However, the escalating imposition of American sanctions on Tehran could potentially disrupt these shipments.

While an immediate impact may not be evident, we have identified two potential implications of the recent attacks in Israel that could have longer-term effects on global oil supply.


Reduced Likelihood of Saudi-Israeli Normalisation

Prior to the attacks, there were discussions about Saudi Arabia potentially increasing oil production in early 2024 as part of an agreement to normalize relations with Israel. However, the intensifying conflict in Gaza has diminished the prospects of near-term normalization in Saudi-Israeli relations. Consequently, the assumption that Saudi Arabia will gradually reduce the additional 1 million barrels per day production cut announced in June 2023, with a gradual production increase slated to begin in 2024. This, coupled with declining oil prices and limited evidence of substantial draws in global commercial oil inventories, lowers the probability of an early rollback of the Saudi production cuts.


Potential Downside Risks to Iranian Oil Production

Another potential consequence of the attacks is the heightened downside risks to Iranian oil production. The de-escalation of regional tensions before the attacks had led to an increase in Iranian oil production over the past year. However, with the possibility of regional tensions resurfacing, particularly between the U.S. and Iran, we now foresee potential risks to Iranian production. We anticipate a significant deceleration in Iran’s crude production growth, with only a marginal increase from current levels.


While the recent attacks in Israel have created substantial uncertainty and concern, it is crucial to evaluate their potential impact on the oil market based on available information. At this juncture, we do not anticipate immediate and significant disruptions to global oil production, the supply-demand balance, or inventories. Nonetheless, the reduced probability of Saudi-Israeli normalization and the potential downside risks to Iranian oil production could have implications for future oil prices.