(Montel) Oil falls but jitters over Middle East 'contagion' persist

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Oil prices fell on Tuesday but the market remained jittery that the current conflict between Israel and Palestinian militant group Hamas could lead to “contagion” in the Middle East oil-producing region.

The front-month contract for Brent crude North Sea oil was last seen down USD 0.60 at USD 87.55/bbl on Ice Futures, having jumped 5% yesterday amid the beginning of the conflict, while the US WTI equivalent traded USD 0.61 lower at USD 85.77/bbl.

“While Israel’s role in global oil supply is limited, the greatest risk is conflict contagion further into the region,” ANZ Bank said in a note, following the targeting of Israeli territory by Hamas this weekend, which prompted retaliatory strikes and an escalating crisis.

“Amid reports suggesting Iran may have helped plan the attacks, any broadening of the conflict could see a significant level of supply come under threat.”

Iran issue

If Tehran was implicated, the US, an ally of Israel, could take a tougher stance against Iran, which might ultimately result in a reduction of crude supply, said ING Bank.

“[The] risks of reduction of oil supply from Iran may keep oil prices at current high levels,” agreed CMC Markets.

In the short term, at least, the oil market was likely to “stay volatile and cautious over possible supply drag”, said analysts at Phillip Nova in a note.

However, in an opinion piece in the Financial Times, the Lex column noted while the conflict in Gaza might have a “big impact on Middle East politics … the oil industry remains no more than a bystander”.

Meanwhile, global economic concerns also continued to worry oil investors.

An economic slowdown could “in turn dent global oil demand”, said Phillip Nova, with key US inflation data due out on Thursday.