Oil Prices Remain Steady Amidst Middle East Tensions and Fed Meeting Anticipation
As tensions rise in the Middle East following Israel’s deployment of ground forces into the Gaza Strip, oil prices have shown resilience. Investors are closely watching the upcoming US Federal Reserve monetary policy meeting, which adds an extra layer of uncertainty to the market.
The global benchmark, Brent crude, experienced a slight dip of 1.06%, bringing it to $89.52 per barrel. Simultaneously, US West Texas Intermediate (WTI) futures recorded a 1.16% decline, reaching $84.55 per barrel.
The Federal Reserve is widely expected to maintain the current interest rates during its two-day meeting scheduled for later this week. This decision comes on the back of the US economy’s robust growth, which exceeded expectations, reaching an impressive 4.9% annual pace in the third quarter.
Israeli Prime Minister Benjamin Netanyahu addressed the nation during a Saturday press conference, revealing that Israel had entered the second phase of the ongoing conflict. He emphasised the expectation of a “long and difficult” campaign as Israel expands its ground operations in the Gaza Strip. Oil prices surged late on Friday, with Brent futures briefly crossing the $90 per barrel threshold.
While the possibility of a major oil supply disruption is not the base-case scenario for analysts, some suggest that the oil market may have become too complacent regarding the likelihood of a substantial Israeli ground incursion in Gaza and the potential for a wider regional conflict.
The escalation of the conflict reintroduces concerns about supply disruptions that have lingered over the market since October 7. In response to these developments, market participants are expected to factor in an additional war-risk premium.
As a result, crude oil prices may experience further adjustments this week, with some experts forecasting the inclusion of more risk premium. ANZ, among others, has echoed similar projections, emphasising the heightened risk associated with the current geopolitical situation.
Although Israel and the Palestinian territories do not serve as major oil players, the conflict’s location within a significant oil-producing region raises concerns about the potential expansion of the war beyond Gaza. US National Security Advisor Jake Sullivan emphasised the “elevated risk” of the conflict spreading to other parts of the Middle East region, with particular concerns about Iran’s involvement.
Iran, as a major oil producer, holds the potential to influence the situation. The US suggests that Iran may align against Israel should it become involved. Israel’s military has accused Iran of orchestrating attacks by militia groups it supports in Yemen, Iraq, and Lebanon. Additionally, Iran is suspected of providing intelligence to Gaza troops and using online messaging campaigns to amplify anti-Israel sentiment.
Notably, Bank of America issued a cautionary note last week, suggesting that any retaliation against Tehran could jeopardise the passage of vessels through the vital Strait of Hormuz. This waterway is considered the world’s most critical oil transit chokepoint. If the strait were to close, experts warn that oil prices could surge beyond $250 per barrel.
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