(Bloomberg) — Oil and gas markets face another volatile week of trading after Israel launched its long-awaited land invasion of Gaza.
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The biggest risk to oil prices after the invasion remains the escalation of the conflict to other regional powers. The Middle East provides about a third of the world’s oil supplies, and Iran, which supports Hamas and other regional militant groups, said over the weekend that an incursion could force everyone to take action.
Crude oil prices traded higher on Friday as Israel stepped up onshore operations, with the price of West Texas Intermediate rising as much as 3.2% to above $85 a barrel. However, this remains below the highest level since the conflict began, just above $90, as it has so far had no real impact on global supplies.
Concerns that the war could escalate into a broader regional conflict that could disrupt oil supplies actually increase the risk of a rise in oil prices, said Giovanni Staunovo, a commodities analyst at UBS Group AG. Price support will come at the beginning of the week, although for now there are no signals of disruptions in oil supplies.
The outbreak of the conflict has already led to several weeks of sharp fluctuations in intraday trade. One of the oil market volatility indicators, measuring the pace of price changes, reached its highest level since June on Friday.
Intensified fighting with Iran-backed Hezbollah in Lebanon over the weekend could increase trader anxiety, while the worst-case scenario for oil markets is any disruption in the Strait of Hormuz, an important waterway for oil.
Unlike oil supplies, gas markets have already felt the impact on production.
The Tamar gas field was closed by Israel following Hamas attacks earlier this month, and while this was partially offset by increased production from the nearby Leviathan field, it still highlights some risks to regional supplies in both markets.
The threat of further escalation also persists. Iran, responding to an earlier call for an oil embargo on Israel, threatened further action over the weekend, without providing details. The United States also struck parts of Syria late last week, a reminder that the world’s largest economy is at risk of becoming embroiled in the conflict.
There were also warnings for shipping in the Red Sea after a US aircraft carrier in the waterway intercepted missiles fired from Yemen towards Israel.
As a result, oil is the main betting topic in financial markets that the conflict could expand beyond Israel and Gaza. Traders are buying options contracts that would benefit from a rise in prices above $100 a barrel in recent weeks.
The volatility associated with trading spot oil contracts is unforgiving, said Michael Tran, an analyst at RBC Capital Markets. Due to the spreading conflict, a significant degree of short-term price asymmetry remains.
– With the help of Julia Fanzeres and Anna Shiryaevska.
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