Oil prices have paused their ascent following the outbreak of war between Israel and Hamas as a major Israeli ground offensive inside the Gaza Strip has so far failed to materialize.
Brent crude dropped more than a dollar during trading on Monday, falling below $91 a barrel at midday off a month-long high of $93.64 reached Friday.
West Texas Intermediate crude fell to $86.57 after climbing above $90 a barrel on Friday.
Multiple reports on Sunday night said the Biden administration told Israel to hold off on an invasion of Gaza to allow more time for hostage negotiations and aid deliveries. The delay may be taking some of the pressure off international energy markets.
Crude prices had been stepping up since war broke out between Israel and Hamas on October 7, breaking a streak of easing energy prices that had analysts feeling encouraged about the path of inflation.
Brent dropped as low as $84 a barrel just before the war, its lowest level since August.
But fears of a wider conflict in the Middle East, where most of the world’s oil is extracted, continue to dog investors, who see multiple scenarios now in which energy prices could rise.
“A contained scenario would see a limited ground operation in Gaza by Israeli forces and sporadic clashes along the Lebanese and Syrian border,” EY economist Gregory Daco wrote in an analysis on Monday.
“In this scenario, we assume oil prices … rise by $3 per barrel relative to prewar, and remain higher through the end of 2024.”
In the event of an “uncontained scenario” involving direct conflict between Israel and Iran, oil prices could jump by as much as $50, reaching $150 per barrel in late 2023, Daco said.
“Real GDP loss over a year would cumulate to nearly $500 billion, with real GDP growth reduced by 1.2 percentage points. Real GDP growth in the eurozone, UK and Japan would be reduced by around 2.0 percentage points, while growth in China would be reduced by 1.5 percentage points at the end of 2024.”
While Israel has so far held off on a large-scale ground operation, it has intensified air strikes and conducted a raid inside Gaza, a 140-square mile patch of land on the Mediterranean Sea surrounded by a border wall. Israel’s military believes there should still be a ground operation inside Gaza, according to Israeli media.
President Biden along with European leaders issued a statement on Sunday that supported Israel while welcoming humanitarian convoys that reached Palestinians civilians in Gaza.
At the United Nations last week, the U.S. vetoed a Security Council Resolution put forward by Brazil that called for “humanitarian pauses” in the conflict.
The pauses would have allowed for “full, rapid, safe and unhindered humanitarian access for United Nations humanitarian agencies and their implementing partners, the International Committee of the Red Cross and other impartial humanitarian organizations,” according to the draft resolution.
The wider economic consequences of a prolonged war in Gaza are hard to predict, but could extend beyond energy into food stuffs and other core commodities.
“The outlook is highly uncertain,” EY’s Daco said, enumerating precedents for the current conflict including the 1973 oil embargo, the 1990–91 Gulf War, the 2006 Israel-Lebanon War and the 2014 Gaza War.
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