But are analysts being too optimistic?
The world is still in shock from the Hamas attack on Israel over the weekend. But one group which seems to have largely taken consequent events in its stride is oil market traders. Just prior to the attack, WTI oil prices had fallen precipitously from their recent peak of $93.68 a barrel in late September to $82.31 last week. On Monday, prices bounced back up to $86.38 before falling to $83.49.
Market chatter appears to be counting on a short war, largely contained to the Gaza Strip. Citi oil analysts told Bloomberg that the market is currently “pricing a scenario that assumes the Israeli response is forceful, but not particularly long-lasting”. Analysts seem to be equally sanguine on the prospect for diplomacy in the region, arguing that “a deal between Saudi Arabia and Israel will be at very least postponed.”
The idea that the war will be short seems unlikely, judging from recent Israeli statements. Maj. Gen. Rafi Milo said to the press that “we have identified the behaviour of Hamas, which realises that it is entering a long war.” This seems like an obvious point, and one wonders why it is lost on markets.
Israel is now all but committed to destroying Hamas — indeed, this is precisely what Prime Minister Benjamin Netanyahu has said. The country has put the militant group’s total number at around 30,000 fighters. To give some context, in the 2014 Gaza War — until now, the deadliest in the Strip — Israel killed just over 640 Hamas fighters over a period of six weeks. Eliminating Hamas would require 47 times the number of fighters killed.
Then there is the territory. The Gaza Strip is 360 square kilometres, no doubt filled with traps and bunkers set up by Hamas. Perhaps the best analogue in recent times is the city of Bakhmut in Eastern Ukraine where the bloodiest fighting of that war so far has taken place. Bakhmut is just over 41 square kilometres, nine times smaller than the Gaza Strip, and had a population of 73,000 before the Russian invasion. The Gaza Strip has more than two million inhabitants, meaning that over 27 times the number of people need to be evacuated and resettled unless the Israelis want to oversee a mass slaughter.
The markets’ optimistic take on the diplomatic situation is likewise in doubt. This week Iranian President Ebrahim Raisi and Saudi Crown Prince Mohammed bin Salman held their first ever phone call. During this eerily timed event, which comes after Iran reopened its embassies in Saudi Arabia in June for the first time in seven years, the two men discussed the “need to end war crimes against Palestine”. One need not be a master diplomat to deduce that the two major regional powers are picking a side.
Some good news for global energy markets can be found in the historical record. In the five major conflicts in which Israel has fought since the Six Day War of 1967, only two brought about major increases in oil prices. Two months after the 2012 operation in the Gaza Strip, oil prices rose by 10%, and three months after the 1973 Yom Kippur War oil prices rose almost 135%. The latter was driven by an Opec-imposed oil embargo in response to the United States’ support of Israel.
If the Israeli operation drags on and becomes increasingly brutal, there is every chance that Hezbollah will attack from the north. This will give other countries in the region an opportunity to stick their oar in if they feel so inclined. Should the war become a regional one, it would not be hard to impose an oil embargo as Russia and Saudi Arabia currently have enormous sway over the oil price, and even in lieu of an embargo are intent on pushing it higher.
Let us hope that the markets are right about the conflict, or we could see another sharp burst of energy inflation rippling through our already fragile economies.