The International Energy Agency (IEA) warned on Thursday that oil markets are likely to remain on edge as the Israel-Hamas conflict persists, with investors closely monitoring the potential for output disruption in the Middle East.
In its latest monthly oil market report, the IEA said that while the conflict had not yet had a direct impact on physical supply, energy market participants would "remain on tenterhooks" as the crisis unfolds.
"The Middle East conflict is fraught with uncertainty and events are fast developing," the IEA said in its report. "Against a backdrop of tightly balanced oil markets anticipated by the IEA for some time, the international community will remain laser focused on risks to the region's oil flows."
The IEA noted a "sharp escalation in geopolitical risk," and said it would continue to closely monitor oil markets and "stands ready to act if necessary to ensure markets remain adequately supplied."
In the event of an abrupt oil supply shortage, the IEA's response includes member countries releasing emergency stocks and/or implementing demand restraint measures.
Israel is not a major oil producer and no major oil infrastructure runs close to the Gaza Strip. However, the Middle East accounts for more than one third of global seaborne oil trade, and the Israel-Hamas conflict has ratcheted up fears the fighting may affect regional energy production.
The IEA report comes as the Israel-Hamas conflict enters its sixth day and follows a devastating and coordinated assault from Palestinian militant group Hamas on southern Israel over the weekend. Israel has since pulverized Gaza with airstrikes and is expected to launch a ground offensive against Hamas in the region in the coming days.
Israel has also ordered the "complete siege" of the Gaza Strip, seeking to stop the supply of electricity, food, water and fuel to the already blockaded population of roughly 2.3 million people.
As a result of the ongoing Israeli-Hamas war, at least 1,200 Israelis have been killed, with more than 2,700 injured, according to Israel's military. Meanwhile, the Palestinian Ministry of Health says 1,203 people in Gaza have been killed, with 5,763 injured.
Oil markets have reacted cautiously to the Israel-Hamas conflict so far. When oil markets opened following the surprise attack by Hamas on Israel on Oct. 7, traders priced in a $3 to $4 risk premium. However, prices have since stabilized.
Crude futures traded higher on Thursday, with international benchmark Brent crude futures with December expiry trading 0.9% higher at $86.59 per barrel at around 9:30 a.m. London time, while front-month November U.S. West Texas Intermediate crude futures rose 0.7% to trade at $84.06 per barrel.
Analysts say that investors are reluctant to push oil prices higher too quickly given the uncertain outlook for the global economy. The COVID-19 pandemic continues to weigh on economic growth, and there are concerns that central bank interest rate hikes could lead to a recession.
However, analysts also warn that oil prices could spike significantly if the Israel-Hamas conflict escalates and leads to a disruption in oil supplies from the Middle East.
The IEA has said that it is ready to respond if there is a disruption to oil supplies from the Middle East. The agency has a stockpile of around 1.5 billion barrels of oil, which it can release to help stabilize markets.
The IEA also has a number of other tools at its disposal, such as demand restraint measures and coordinated action with OPEC and other oil producers.
However, the IEA has warned that its tools are limited, and that it cannot prevent oil prices from rising significantly if there is a major supply disruption.
