Oil markets reacted more "coolly" than expected to the conflict between Israel and Hamas. Many believed that the attack by Hamas and the response from Israel would send oil prices skyrocketing. However, in the first days following the start of hostilities, oil prices on the international market rose by around 4%, a rate that caused an impression. However, as it turns out there is an explanation for this particular reaction.
Speaking to Economy Today, Brasidas Neophytou, head of investment research at Exclusive Capital, notes, among other things, that despite the war conflicts, the supply of oil has not been interrupted, while at the same time, countries with large fields such as Saudi Arabia and Iran have not been involved in hostilities.
In more detail, asking Mr. Neophytou to list the reasons why oil prices rose "only" by 4% during the first days of the conflict, he said: In the last 50 years, oil prices have only risen "sharply" when the supply of oil is affected or interrupted for any reason, which has not been done so far. And the reason it hasn't been done is the following: The Levant region (Israel, Syria, Lebanon, Palestine, Egypt, Cyprus) has the misfortune of not producing oil (only minimal quantities) but only natural gas, and that underwater (more expensive to mine). With this data, and since other neighboring countries did not get involved in the conflict with large oil fields, such as Saudi Arabia and Iran, then we did not (so far) have a supply interruption, and therefore we did not have a bigger rise in the price oil.
However, added Mr. Neophytou, the risk remains and that is why we have a 4% rise in the market, as it reflects the "geopolitical risk" or "geopolitical risk premium". The "geopolitical risk premium" exists because the war in Israel is adjacent to the oil-rich countries of the Persian Gulf (Saudi, Kuwait, Iraq, Iran, Qatar, UAE). It is also adjacent to the most important maritime passages for oil exports, such as the Strait of Hormuz in the Persian Gulf through which 40% of the world's oil exports (to Asia) pass, the Suez Canal (imports from Europe), and the Straits of Yemen (Aden), where 30% of world shipping is threatened.
In conclusion, Mr. Neofytou underlines that all this changes of course with any development that could affect the black gold demand-supply equation.
Source: EconomyToday