Will Israeli Action Affect Oil Prices

We are now two days into the Israeli action on Gaza, and the pattern behind the price of oil has become a little clearer. When the action first came through on the news wires, there was an immediate surge in prices as speculators became worried that supply from the Middle East might be constrained. However, as some older and wiser heads noted – we have been here before – and after a few hours of large gains, the price began to fall back slightly.

On Thursday, a whole slew of negative economic data came out, including the fact that the Eurozone had re-entered recession. Some US manufacturing data also disappointed, dropping much more than many pundits had predicted. When this was combined with what was happening in the middle east (where the threat of an immediate ground war had receded and a ceasefire had been called) – oil dropped signifcantly in early trades on November 16th.

So, what can we surmise? If the situation in the middle east remains fairly constant, it should not have a significant effect on oil prices and the markets will look more towards economic data to drive prices (and this data is very negative at the moment). However, if Israel does launch a ground war, or if the country’s neighbours get embroiled in the affair – we can expect to see raised nervousness on the markets and a likely increase in prices (despite low global demand and high global supply).