The war in the Middle East is having substantial repercussions on oil prices as the potential for regional escalation and disruption to global energy markets is high. The Middle East accounts for 31% of global oil production, 18% of natural gas production, 48% of the world’s proven reserves, and 40% of the world’s proven natural gas reserves.

Oil prices surged nearly 2% on Wednesday as tensions escalated following an attack at a Gaza hospital. This raised concerns about potential disruptions in oil supply from the region and dampened hopes for a quick de-escalation of the conflict.

The prospect of the Israel-Hamas conflict expanding and involving other Middle Eastern nations has been a driving factor behind the recent surge in oil prices, despite challenges posed by the recent strength in the U.S. dollar and fears of interest rates staying higher for longer. Following the hospital blast Jordan cancelled a summit with U.S. President Joe Biden and other regional leaders, increasing the geo-political complexity.

This diplomatic development has heightened concerns about further escalation of the conflict and triggered a sharp rise in oil prices. Additionally, the scenario where the conflict gets prolonged is seen as a potential catalyst for crude oil prices to rise further from here, as it increases the risk of the Israel-Hamas conflict broadening and potentially involving Iran directly.

Source: TradingView

Beyond geopolitical factors, there are other drivers bolstering oil prices. The U.S. crude stockpiles for the week ending on the 13 ^th of October saw an unexpected 4.4 million barrel reduction, far exceeding the forecasted 1.3 million barrel decrease, according to the American Petroleum Institute. This drop follows a prior week of significant stockpile growth and coincides with rising U.S. exports, steady gasoline, and distillate consumption. Also, September’s industrial production retail sales in the U.S. – the world’s biggest oil consumer – were robust, suggesting demand for crude is steady.

Oil prices got additional boost from encouraging economic data from China – the world’s biggest oil importer. China’s economic growth exceeded expectations in the third quarter, reflecting the impact of recent policy measures that support a nascent economic recovery. China’s record-high oil refinery throughput in September is up 12% from the previous year, which has been driven by surging demand for transport fuel during the Golden Week holiday and improved manufacturing activity.

Anticipations of tighter global oil supplies, resulting from substantial production cuts by Saudi Arabia and Russia, continue to underpin oil prices. These cuts have been a primary driver of price rises this year, despite persisting economic challenges. The Department of Energy’s report revealing that the Strategic Petroleum Reserve’s inventory remains near a 40-year low, coupled with limited purchases under the Biden Administration’s buyback program, further highlights the current oil market dynamics.