LONDON—Oil prices surged more than 2 percent on Monday as military clashes between Israel and the Palestinian terrorist group Hamas ignited fears of a wider conflict in the Middle East.
Brent crude was up $2.28, or 2.7 percent, to $86.86 a barrel by 0859 GMT, while U.S. West Texas Intermediate crude was at $85.23 a barrel, up $2.44 or nearly 3 percent. Both benchmarks spiked by more than $4 a barrel earlier in the session.
The surge in oil prices reversed last week’s downtrend—the largest weekly decline since March—in which Brent fell about 11 percent and WTI retreated more than 8 percent as a darkening macroeconomic outlook intensified concerns about global demand.
While the underlying supply-demand balance is unaffected, said Tamas Varga of oil broker PVM, “any rise in tension in the Middle East usually leads to an increase in oil prices and it is no different this time around.”
Hamas on Saturday launched the largest military assault on Israel in decades, triggering a wave of retaliatory Israeli air strikes on Gaza.
The eruption of violence threatens to derail U.S. efforts to broker a rapprochement between Saudi Arabia and Israel, in which the kingdom would normalize ties with Israel in return for a defence deal between Washington and Riyadh.
Riyadh and Moscow have agreed to a combined 1.3 million barrel per day (bpd) voluntary cut until the end of 2023.
The question is how long will this oil rally last, Citi analysts said.
“Timing is everything and the attacks almost certainly postpone any Saudi-Israeli rapprochement, along with any high probability expectation of Saudi Arabia reducing or eliminating its extra 1 million bpd cut if prices resume their recent fall.”
There are also questions about whether Iran will be implicated in the conflict.
“If the conflict envelopes Iran ... up to 3 percent of global oil supply is at risk. And if a wider conflict eventuates that ends up impacting transit through the Strait of Hormuz, around 20 percent of global oil supply could be held hostage,” energy analyst Saul Kavonic told Reuters.
