Oil prices went down on Monday, even though Israel increased its military operations against Hamas.
However, there’s still a chance that prices could go up.
Brent crude, a major global oil benchmark, dropped by 1.6% to $89 per barrel, while West Texas Intermediate (WTI) crude, the US benchmark, fell by 1.9% to $84 per barrel as of 8:47 a.m. ET. Last week, Brent fell by 1.8%, and WTI dropped by 3.6%.
According to Richard Bronze, co-founder and head of geopolitics at consultancy Energy Aspects, the main reason for these drops is probably worries about the global economy’s health and its impact on the demand for oil.
There are signs that oil demand is decreasing worldwide, especially in Europe.
This was further emphasized when Germany, the largest economy in Europe, reported a shrink in its gross domestic product in the third quarter as people spent less money.
Even though Israel’s ground offensive in Gaza was anticipated, there are still concerns about the possibility of a regional escalation, as Susannah Streeter, head of money and markets at Hargreaves Lansdown, pointed out.
The World Bank mentioned that an escalation in the fighting in Gaza could lead to unpredictable outcomes in global commodity markets, including oil markets.
They presented three scenarios in which oil prices could surge.
According to Indermit Gill, the lender’s chief economist, “Policymakers will need to be vigilant.
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.”
The World Bank, in its Commodity Markets Outlook, predicted that global oil prices would average $90 a barrel in the fourth quarter before dropping to an average of $81 a barrel next year due to slower global economic growth.
However, if the conflict were to escalate and disrupt oil supplies, prices could increase by as much as 75% to $157 a barrel in the worst-case scenario, which would be comparable to the disruption caused by the Arab oil embargo in 1973.
The World Bank also stated that a smaller disruption, similar to the one caused by the Libyan civil war in 2011, could push oil prices to $103 a barrel.
A medium-level disruption, similar to the fallout from the Iraq war in 2003, could raise prices to $121 a barrel.
Since Hamas attacked Israel on October 7, prices for Brent have gone up by 5.7%, resulting in the deaths of over 1,400 people, mostly civilians.
Tensions in the region increased on Saturday when Israeli troops intensified their ground operation in Gaza following weeks of aerial strikes on the Hamas-controlled area.
Israeli Prime Minister Benjamin Netanyahu mentioned that the country was prepared for a “long and difficult war.”
Israel sent more ground forces into Gaza overnight, and according to Israeli army spokesman Daniel Hagari, their activity is set to intensify.
US national security adviser Jake Sullivan highlighted the fears of a broader regional conflict, saying there was an “elevated risk” of the conflict “spreading to other parts of the region.”
Iranian President Ebrahim Raisi also stated that Israel’s offensive had “crossed the red lines” and “may force everyone to take action.”
Iran is a significant player in the region and is allied with Hamas and Hezbollah, a Lebanese militant group involved in recent exchanges of fire with Israel.
Initial US intelligence suggests that Tehran was surprised by the October 7 attack by Hamas in Israel.