Oil Dips As Israeli Security Cabinet Approves Gaza Ceasefire, Yet Experts Warn Red Sea Risks Persist

The Israeli Security Cabinet's approval of a ceasefire in Gaza has led to a dip in oil prices, as the immediate threat of a broader conflict in the Middle East has been reduced. However, experts warn that long-term geopolitical risks in the Red Sea region could still impact oil prices in the coming months.

The conflict between Israel and Hamas had put upward pressure on oil prices, with the global Brent oil benchmark rising nearly 5% in trading on Monday, October 9, 2023. The escalation of tensions had raised concerns about potential disruptions in oil supply, as the Middle East is a critical region for the production and transport of a large share of global oil output. However, with the ceasefire in place, the immediate threat of a broader conflict in the region has been reduced, alleviating some of the concerns about potential supply disruptions and leading to a decrease in oil prices in the short term.

The International Energy Agency (IEA) had previously highlighted the prospect of "higher for longer" interest rates due to fluctuating prices, slowing down economic and demand growth for crude oil. With the ceasefire, the uncertainty surrounding the conflict is likely to decrease, which could lead to a more stable oil price environment in the short term. Additionally, the IEA had noted that voluntary cuts by Opec+ were expected to keep the oil market in deficit as Opec+ could pump 1.3 million barrels per day (mb/d) below the call on its crude in 4Q23. The ceasefire is not expected to change this dynamic, as the production cuts by Opec+ are still in place. Therefore, the oil market is likely to remain in deficit, which could help to support oil prices in the short term.

However, it is important to note that the ultimate impact of the ceasefire on oil prices remains uncertain, as the situation in the Middle East is still volatile and unpredictable. Any further escalation of tensions or disruptions in oil supply could still lead to price volatility in the short term.

Long-term geopolitical risks in the Red Sea region could also impact oil prices in the coming months. The Red Sea region is a critical area for global oil trade, with the Strait of Hormuz being a major chokepoint for oil exports. Several long-term geopolitical risks in this region could potentially affect oil prices:

1. Iranian Influence and Tensions: Iran's influence in the region, particularly its support for groups like Hezbollah and Hamas, has been a source of geopolitical tension. Any escalation in these tensions, such as a direct involvement of Iran in regional conflicts, could disrupt oil supply and increase prices. For instance, in the context of the Israel-Gaza war, the potential involvement of Iran in the conflict has raised concerns about the security of oil shipments through the Strait of Hormuz (Source: CNN, 2023).
2. Yemen Conflict: The ongoing conflict in Yemen, involving Iran-backed Houthi rebels and a Saudi-led coalition, poses a risk to oil shipping routes. Attacks on oil tankers in the Red Sea and the Bab el-Mandeb Strait have already occurred, highlighting the potential for disruptions in oil supply (Source: BBC, 2021).
3. Saudi Arabia's Stability: Saudi Arabia is the world's largest oil exporter, and any instability or disruption in its oil production and export capabilities could significantly impact global oil prices. While the country has taken steps to diversify its economy, it remains heavily reliant on oil exports. Political instability, terrorism, or cyberattacks on Saudi oil infrastructure could lead to supply disruptions and price increases (Source: World Bank, 2021).
4. Egypt's Political Stability: Egypt controls the Suez Canal, a vital waterway for global oil trade. Political instability or unrest in Egypt could disrupt oil shipments, affecting global oil supply and prices. Additionally, Egypt's relations with other regional powers, such as Saudi Arabia and Iran, could influence the geopolitical dynamics in the Red Sea region (Source: Al Jazeera, 2021).
5. Climate Change and Sea-Level Rise: Long-term climate change could lead to sea-level rise, threatening coastal oil infrastructure and potentially disrupting oil production and export in the Red Sea region. This could have implications for global oil supply and prices (Source: IPCC, 2019).

In conclusion, the approved ceasefire in Gaza has led to a dip in oil prices, as the immediate threat of a broader conflict in the Middle East has been reduced. However, long-term geopolitical risks in the Red Sea region could still impact oil prices in the coming months. Investors should closely monitor the situation in the Middle East and the Red Sea region to assess the potential impact on oil prices and make informed investment decisions.