THE Israel-Hamas conflict, which may escalate Iran-US tensions and lead to stricter Iranian export sanctions, risks driving up crude oil prices, said analysts on Tuesday (Oct 10), even as Asian markets ended the day mostly in positive territory.

The Straits Times Index closed 1 per cent higher, while the FTSE Bursa Malaysia KLCI was up 1.3 per cent. The Hang Seng Index gained 0.8 per cent, Indonesia’s IDX Composite closed 0.5 per cent higher and the Nikkei 225 rose 2.4 per cent.

Charu Chanana, markets strategist at Saxo Capital Markets, attributed the gains to a “slightly less hawkish stance” from United States Federal Reserve officials on Monday.

Fed vice-chair Philip Jefferson hinted that the recent spike in US Treasury yields may allow the Fed to take a more dovish stance on interest rates.

“Still, ramifications from the Israel-Hamas conflict will likely continue to underpin volatility in the coming weeks,” Chanana added.

The price of Brent crude had risen 5 per cent on Monday following an escalation of the conflict. OCBC economists expect higher prices to persist and reach an average of US$90 per barrel in the fourth quarter.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

This projection is based on the assumption that tensions are contained in Gaza and Israel, even if there is a prolonged conflict.

They highlighted that global oil prices had remained elevated for a month after major tensions escalated in the past. For example, oil prices surged 51.9 per cent a month after the Arab coalition attacked Israel in 1973.

“The scale, intensity, duration and breadth of the ongoing situation will be important factors in determining the impact on oil prices in the coming months.”

The economists also noted that tensions could be prolonged given the scale of Hamas’ offence, and Israel’s open declaration of war under the US’ enhanced military support.

“The elephant in the room, amid the escalation of Israel and Palestine tensions, is the role of Iran.”

Despite no concrete evidence linking Iran to Hamas’ attacks, Iran was reported to be indirectly behind the attacks. Any escalation of the situation could add to Iran-US tensions, squeezing the oil market if the US imposes stricter sanctions on Iran’s oil exports.

The risk is heightened as Iranian supply of crude oil had been quietly increasing under weak enforcement of sanctions before the Hamas attacks.

Iran’s crude oil production increased to three million barrels per day in August, or 11 per cent of the Organization of the Petroleum Exporting Countries’ (Opec) total production, from 2.4 million barrels per day in 2021. Iranian crude exports were also reported to have surged to the highest level in more than four years in September.

The conflict could also evolve into a broader regional confrontation to involve Saudi Arabia and the United Arab Emirates, in addition to Iran.

“This conflict may pose challenges to the ongoing diplomatic efforts around Saudi and Israel relations. The impetus for Saudi Arabia to unwind earlier production cuts may, therefore, be reduced.”

Brokerage UOB Kay Hian (UOBKH) agreed that as both Israel and Palestine are in a wider key oil-producing region, the potentially broadened conflict could pose greater upside risk on both oil prices and geopolitical risk premium in the midterm.

Markets could experience another spike in oil prices as a knee-jerk reaction if the US reintroduces Iranian export sanctions, said UOBKH analyst Kong Ho Meng.

Kong added that other demands, however, could absorb the sanctioned crude, as shipping data showed that over 80 per cent of recent Iranian crude loadings were shipped to China.

As both Israel and Palestine are not major oil producers, the situation is unlikely to create a supply shortage in the near term. He also pointed out that there was minimal impact to crude demand, except for flight cancellations in Israel.

Nonetheless, he expects oil price surge pressure because global inventories are already low under Opec+ coalition management that furthered production cuts.

On the stock market, Kong expects this geopolitical conflict to spur higher demand for energy security and crude flows, just like the Russia-Ukraine crisis.

Among Malaysian stocks, Kong favours Yinson and Uzma as long-term buys, as their small size allows them to stay nimble and “ahead of the game in non-oil and gas diversification”.

He also highlighted several oil price beneficiaries: Hibiscus Petroleum, crude and gas vessel charter MISC, and energy storage provider Dialog Group.

“While a bullish oil sentiment for Q4 2023 was almost a certainty, future volatility is now greater depending on oil demand and transition pathways...

“We maintain sector overweight, but advise being selective on companies that are nimble towards changes,” said Kong.