Chart of the Week: The current prospects for oil prices

On 1 October the Israeli military began land operations in southern Lebanon. This latest instalment of unrest in the Middle East has rekindled fears of an oil crisis, with the prospect of threat of higher oil prices threatening to undo some of the good work done in tackling global inflation. With the exception of the 2014 Gaza war, recent conflicts involving Israel have each resulted in an oil price spike in the first month of fighting. The shock varied from 36% in the first eight days of the 2008 Gaza war (although this large spike also coincided with the Global Financial Crisis), to 4% in the first four days of the 2006 Lebanon war. Oil prices did rise by almost 10% in the first ten days of the 2023 Gaza war but the spike was short-lived, and prices subsided as the financial ramifications of the conflict moved down investors’ list of concerns. Fear returned to the markets as soon as the Israeli armed forces crossed the Lebanese border, and oil prices have jumped by around 8.7%, with the increases fuelled by talk of bombing Iran’s oil and nuclear facilities. The threat of escalation adds pressure to oil prices not only though the fundamental dynamics of supply and demand, but also through a potential strengthening of the US dollar in which oil prices are measured. Seen as a safe asset, the dollar has historically tended to rise during geopolitical crises. More recently, it has also benefited from rising oil prices since the US became a net oil exporter, thus amplifying the impact of rising oil prices for other countries.

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The views expressed in this article are the views of the author, not necessarily those of LSEG.

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