Supply Threat:

The Middle East, which is the center of the conflict between Hamas and Israel, holds a large part of the world’s oil reserves and is a major source of oil and natural gas. The region boasts 31% of global oil production, 18% of gas production, 48% of proven oil reserves, and 40% of proven gas reserves, making it a crucial player in global energy markets. Thus, any regional instability would result in an interruption of energy supplies followed by fluctuating energy prices throughout the world. Historical events may demonstrate the true role the region plays in supporting the stability of global energy markets, driven by expectations regarding the potential effect of the conflict on Middle Eastern energy production.

Thus, Hamas’s surprise attack on Israel, the so-called "Operation Al-Aqsa Storm," and the resulting state of war between the two parties, has played a role in destabilizing global energy security, particularly given the worsening fears of an outbreak of full war that may disrupt global energy markets.

Direct Implications

The current war between Hamas and Israel has had several direct implications on energy markets, the most significant of which include the following:

1. European natural gas and oil futures rise: Following Hamas’s attack on Israel, global oil prices trended upward on October 9^th, the first day of trading after the surprise attack on October 7^th. Brent crude rose 4.2% to USD 88.15 per barrel, and West Texas Intermediate crude increased 4.3% to USD 86.38 per barrel. Meanwhile, European natural gas and global oil futures rose by 14% and 4%, respectively, reflecting the uncertainty in global energy markets amid fears that the conflict will escalate. Along with the unstable security situation, Brent crude jumped to more than USD 90 per barrel last week as the attacks unfolded.

2. Natural gas buyers suspend their purchasing plans: Following the jump in global energy prices amid the raging conflict between Israel and Hamas, due to worsening supply risks, and the rise in European energy prices, Asian liquified natural gas (LNG) spot prices surged to about USD 10 per million British thermal units, a measure of energy quantity. This is the highest price in nearly eight months and is causing LNG buyers in Asia to postpone and suspend their purchasing until prices come down, before more gas shipments are reserved for the winter when the demand for heating increases.

3. Israel shuts down large offshore production platform: As the fighting intensified on October 9^th, Israel asked the American energy company, Chevron, to halt production in the offshore Tamar field, which represents about half of Israel’s domestic gas and is also a source of gas for both Egypt and Jordan. The next day, Chevron announced that it had stopped exporting natural gas through a major underground pipeline extending between Israel and Egypt.

4. Israel’s largest oil-importing port closes: On October 9^th, the port of Ashkelon and its oil terminal, located more than 10 kilometers from Gaza, were closed amid the recent attacks and the intensifying fighting between Hamas and Israel. This may be a dangerous development because the port of Ashkelon is Israel’s largest oil-importing port.

Possible Scenarios

Fears are growing over the impact of the ongoing war between Israel and Hamas on global energy security, based on several possible scenarios should the war be prolonged. These concerns can be reviewed as follows:

1. Concern about possible sanctions on Iran: If the conflict escalates and lasts, the US may resort to strengthening or intensifying the sanctions on Iran, especially if it was involved in Hamas’s attack on Israel. This would increase pressure on the global energy market, which is already suffering from a supply shortage. This may move Iran to close the Strait of Hormuz through which about one-third of seaborne oil passes. According to some Western experts, oil prices are not likely to increase significantly unless there is a disruption in the Strait of Hormuz, which is considered the most important oil artery in the world and carries a fifth of the world’s supplies.

Despite US sanctions, Iranian crude exports have grown greatly this year, which has compensated for some of the voluntary oil production cuts in Riyadh and Moscow, amounting to 1.3 million barrels a day. However, tightened US sanctions on Tehran would threaten crude oil supplies and push energy prices upward globally and domestically. This is a scenario that President Biden may wish to avoid ahead of the 2024 elections.

2. European fears of a widespread energy crisis: A prolonged war could result in rerouting tankers loaded with LNG, thus causing further energy price increases in Europe. This is already happening, with natural gas prices reaching their highest levels in six months. The continuing upward trend in energy prices may embroil Europe in a serious energy crisis after a period of relative calm over the summer months, particularly with winter approaching when the demand for heating rises.

3. Potential disruption of main supply lines: If the fighting spreads to other countries, energy analysts worry it could send shockwaves through global energy markets, disrupt crucial supply lines, and, in turn, cause devastating human losses. In addition to affecting the natural gas industry in Israel—which has become a pillar of Israel’s economy and energy security over the last decade—the war also threatens to raise oil prices, disrupt the orderly flow of oil from the region, and impede international shipping in the vital Strait of Hormuz. Iran would then become a direct party in the conflict, which could fuel volatility in global energy markets.

4. Pressure on OPEC to reverse the policy of reducing oil production: Harsher sanctions, or other factors that might restrict Iranian exports in the fourth quarter of this year, could put pressure on the Kingdom of Saudi Arabia to reverse production cuts sooner than expected. Notably, the Kingdom had already recently extended its oil production cuts by one million barrels per day through the end of 2023. However, rising oil prices, alongside fears of inflationary effects and weak growth projections in the major consumer countries, could collectively incentivize Saudi Arabia to increase supplies.

5. Potential pullback from energy deals: Energy experts fear that rising numbers of civilian casualties will hinder the operation of energy companies and threaten their continuity, including NewMed’s operations in the Leviathan natural gas field, which it discovered in 2010 with its partners in the Levant basin region. Leviathan extends to the maritime borders of Israel, Lebanon, Palestine, the Republic of Cyprus, and the Republic of Turkish Cyprus, and it contains 22.9 trillion cubic feet of recoverable gas, making it the largest natural gas reservoir in the Mediterranean Sea and one of the largest-producing assets in the region.

In addition, last August, a French energy group established the first drilling platform in the Mediterranean off the coast of Lebanon near its border with Israel, and it is set to begin gas exploration, but all of these operations may be halted or subject to severe losses if the war is prolonged and spreads.

Key Determinants

In summary, the conflict in the Middle East may agitate the global energy market, as the region is both a vital energy supplier and a key shipping corridor. Hence, analysts fear that the consequences of the continuation of the war and the resulting widespread security instability may destabilize global energy security. In this vein, there are issues that occupy analysts when considering the degree to which the war will threaten global energy security, including the likelihood of changes in oil-market management. In this context, some analyses tend to say that major changes in oil-market management are unlikely, but that Saudi Arabia, along with its producer allies in OPEC+, will likely seek to monitor the effect of current events while avoiding making any decisions based on short-term fluctuations. Accordingly, OPEC’s actions in the escalating conflict between Israel and Hamas depend on several factors that may include studying the gravity and duration of the conflict, its effects on oil production and logistical services, and global demand for oil during this period.

If the conflict persists, the impact on energy prices and OPEC’s resulting response will mainly depend on the size and scale of the conflict. If the conflict remains local without broadly affecting major oil producers or distribution routes, energy prices may see an immediate but limited change, which would prompt OPEC to maintain current levels of production.

If regional instability worsens, but without a direct effect on key oil sources or routes, the global energy market may see speculative transformations, which would push OPEC to consider increasing production in order to stabilize prices.

On the other hand, if oil supplies are exposed to widespread risks, and the conflict spills over to other countries or, in turn, affects important corridors such as the Strait of Hormuz, OPEC may be required to increase production or work with oil producers from outside of OPEC to maintain market stability. The worse the conflict gets and if it includes, for example, Hezbollah or Iran, the more important and urgent OPEC’s interventions will be because this may also be accompanied by stronger US sanctions on Iranian oil exports.