Oil prices spike as strife in Israel raises fears of widening conflict

The conflict in Israel — and the prospect of reverberations across the Middle East — sent crude prices higher Monday amid fears that geopolitical tensions could disrupt global supplies.

Brent crude, the global benchmark, jumped roughly 4% to $88 a barrel, while West Texas Intermediate, the U.S. benchmark, jumped added around 4% to roughly $86 a barrel. Natural gas prices jumped more than 10%, according to futures contracts tracked by Yahoo Finance, after Israel ordered Chevron to halt production on a large natural gas platform in the Mediterranean Sea.

The CBOE volatility index, known as Wall Street’s “fear gauge,” also reflected these fresh geopolitical jitters, spiking 7.5% Monday morning before moderating throughout the day. But U.S. stocks brushed off the news and moved higher, with the Dow Jones Industrial Average and S&P 500 both gaining around 0.6%, and the tech-heavy Nasdaq index climbing 0.4%.

Middle East tensions aside, fuel prices in the United States and elsewhere remain a source of concern, as policymakers’ efforts to get inflation under control hinge in part on controlling energy costs. The price of gasoline in the United States stood at $3.70 per gallon on average Monday, up from around $3.20 at the start of the year.

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Gasoline prices closely follow the price of crude oil, albeit with a lag of a few weeks, and oil is a global commodity whose price can be highly volatile and sensitive to geopolitical conflict. Oil prices surged more than 50% in the first half of 2022 after Russia began its invasion of Ukraine ― at one point topping $120 per barrel ― before moderating somewhat. Prices have generally fluctuated between $70 and $90 per barrel over the past year.

Investors now appear to be reacting to the possibility that global conflict could upend markets yet again.

Iran in the spotlight

The Wall Street Journal reported Monday that Iran’s Revolutionary Guard Corps helped Hamas plan Saturday’s assault on Israel, a revelation that could result in broader sanctions against Iranian oil if confirmed. A broader conflict in the Middle East could also threaten efforts to normalize Israel’s relationship with Saudi Arabia.

The crude market is “hypersensitive to any indication that the conflict between Israel and Hamas is poised to expand into the oil producing region in the Middle East,” said LPL Financial chief global strategist Quincy Crosby.

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To Raymond James analyst Pavel Molchanov, the spiking oil price appears entirely speculative. Before the conflict, crude prices had experienced a momentary downward trend owing to a meeting of international energy producers, he noted.

“The fact that oil prices are up today is a textbook illustration of how the geopolitical risk premium in the oil market can fluctuate based on headlines,” Molchanov said. “Keep in mind, last week there was a sharp drop in prices after the OPEC meeting, so today’s move simply cancels out a portion of that.”

Some so-called “safe-haven” assets, such as gold, also saw drew increased investor interest early Monday. “Whether this is a massive market moment or not depends on how long it lasts and whether others are sucked into the conflict,” Brian Jacobsen, chief economist at Annex Wealth Management, told Reuters.

Stock prices of several U.S.-based defense firms also surged Monday. Lockheed Martin, the world’s biggest defense contractor, had gained 8.9% by midafternoon. Raytheon Technologies gained 4.6%, Northrop Grumman gained 11.4% and General Dynamics climbed 8.4%. By contrast, Elbit Systems, a major Israeli defense contractor, saw its stock decline 2.2%.

“The U.S. will look to accelerate the shipment of equipment, along with munitions at a time when supply is constrained,” Jefferies investment bank analyst Sheila Kahyaoglu wrote.