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Middle East War Causes Oil Prices to Plummet

After experiencing a surge earlier this summer with oil prices reaching $100 a barrel, crude oil costs are once again tumbling. However, the recent outbreak of war in the Middle East has caused oil prices to increase once more.

As the fighting intensified between Israel and Hamas after the terrorist group attacked Israel from Gaza over the weekend, traders drove up the price of oil by as much as 5 percent. Although there is no oil production in Gaza and Israel only produces a small amount for domestic use, experts warn that prices could rise further if the conflict expands throughout the region, particularly if Iran becomes more involved in the war.

A note released by Citi investment research stated, “Any expansion of battles will have potential repercussions on oil markets.”

Energy prices have been declining over the past week partly due to unexpectedly strong oil output from several countries, including members of the Organization of the Petroleum Exporting Countries. This decline can be attributed to weak economic growth in China as well as concerns about growth in Europe and the United States caused by high interest rates.

According to the AAA motor club, the average price for a gallon of regular gasoline in the United States dropped to $3.70 on Sunday, over 11 cents lower compared to a week ago.

However, this relief for drivers is now at risk following a significant geopolitical event, similar to how Russia’s invasion of Ukraine caused a surge in oil and natural gas prices last year.

Clearview Energy Partners, an analytics firm, stated in a research note, “War in the Middle East can be generically bullish for crude,” especially if the conflict drags on.

Global oil benchmarks increased by just over 5 percent when markets opened after the weekend. The West Texas Intermediate oil price rose to $87 a barrel, which is a relatively modest increase considering the outbreak of war in the oil-rich Middle East. This increase follows several days of price decline due to expectations of weakening oil demand. Last week, the inventories of American gasoline climbed above the five-year average for this time of year. Just two weeks ago, many analysts predicted a surge to $100 a barrel oil.

One reason behind the recent softening of oil prices was growing speculation that Saudi Arabia, the United States, and Israel were nearing a political deal that could eventually lead to Saudi recognition of Israel. There were hopes that Saudi Arabia might increase oil output to lower gasoline prices and aid the Biden administration in selling any potential deal to the U.S. Congress.

Nevertheless, the conflict between Israel and Hamas is likely to complicate the chances of such a deal between Israel and Saudi Arabia. Although oil production in the United States, Canada, Brazil, and Guyana has increased in recent years, the Persian Gulf remains a significant source and transit point for nearly one-fifth of global oil supplies, particularly to Asia. Despite Western sanctions, Iran remains one of the biggest oil producers in the Middle East.

If it is revealed that Iran played a role in instigating, financing, or planning Hamas’ attack on Israel, the conflict could escalate beyond Israel’s borders.

In recent months, the Biden administration has relaxed sanctions on Iran to encourage the country to slow down its nuclear program, which allows Tehran to export more oil into the tight global markets. However, there is likely to be increasing pressure to tighten sanctions again as the Biden administration provides more assistance to Israel.

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