Oil prices drop as Israel-Gaza tensions ease

Oil prices fell on Monday as Israel announced that it had ended its air strikes on Gaza, reducing the fears of a wider conflict in the Middle East that could disrupt oil supply.

Israel said on Monday that it had “concluded” a series of air strikes on Gaza, after days of intense fighting with the Hamas militant group that controls the Palestinian enclave. The Israeli military said it had targeted Hamas’s infrastructure, weapons, and operatives, in response to rocket attacks on southern Israel that killed 12 Israelis and injured dozens more.

The air strikes, which began on October 7, 2023, also killed over 250 Palestinians and injured thousands more, according to Gaza health officials. The strikes also damaged buildings, roads, and power lines, leaving many Gazans without electricity, water, or medical care.

The Israeli announcement came after Hamas said it was ready for a ceasefire, and after international pressure mounted on both sides to end the violence and resume the peace talks. Egypt, Qatar, and the United Nations were involved in mediating between Israel and Hamas, while the U.S., the European Union, and other countries called for an immediate halt to the hostilities and a return to the two-state solution.

Oil prices fall on lower risk premium

Oil prices, which had risen by about 6% last week due to the geo-political risks in the Middle East, fell on Monday as the Israel-Gaza tensions eased. Brent crude futures, the global benchmark, were down 43 cents, or 0.5%, at $81.76 a barrel, while U.S. West Texas Intermediate crude futures, the U.S. benchmark, were 46 cents, or 0.6% lower, at $76.38 a barrel at 0135 GMT.

Analysts said that the oil market had priced in a higher risk premium due to the possibility of a broader regional conflict that could affect the oil supply from the Middle East, which accounts for about a third of the global production. However, as the situation calmed down, the risk premium diminished, and the oil prices corrected.

However, analysts also warned that the oil market remained volatile and uncertain, as the underlying factors that triggered the Israel-Gaza conflict, such as the Israeli occupation, the Palestinian grievances, and the Iranian influence, were still unresolved. They said that any flare-up or escalation could reignite the oil price rally, and that the oil market would closely monitor the developments in the region.

Other factors affecting oil prices

Apart from the Israel-Gaza situation, oil prices were also influenced by other factors, such as the supply-demand balance, the U.S. dollar, and the coronavirus pandemic.

On the supply side, oil prices were supported by the continued production cuts by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, which have been limiting their output since April 2020 to cope with the demand slump caused by the pandemic. OPEC+ agreed in September 2023 to maintain their current output levels until the end of the year, despite the rising demand and prices.

On the demand side, oil prices were boosted by the recovery of the global economy, especially in China, the world’s largest oil importer, which has largely contained the coronavirus outbreak and resumed its industrial and commercial activities. However, oil prices were also weighed down by the resurgence of the virus in some parts of the world, such as Europe, India, and the U.S., which have imposed new lockdowns and restrictions to curb the spread of the disease.

On the currency side, oil prices were affected by the movements of the U.S. dollar, which is the main currency used for oil transactions. A weaker dollar makes oil cheaper for buyers using other currencies, and vice versa. The dollar index, which measures the greenback against a basket of six major currencies, was down 0.1% on Monday, making oil more attractive for non-dollar buyers.

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