Oil falls as concerns about Mideast supply ease

Oil prices dipped even after Israel sent ground forces into the Gaza Strip, raising tensions in the Middle East, as investors closely monitor the U.S. Federal Reserve’s monetary policy meeting later this week.

Global benchmark Brent was down 2.8% at $87.89 per barrel. The U.S. West Texas Intermediate futures last declined 3.5% to $82.57 per barrel.

“I think the market had priced in the incursion on Friday and tonight is more ‘sell the fact,’” Bob McNally, president of Rapidan Energy Group, told CNBC via email. He said the ground operations were “limited so far” and noted other macroeconomic concerns.

The Fed is expected to leave rates unchanged at the end of its two-day meeting on Wednesday, after the U.S. economy grew faster than expected at a 4.9% annual pace in the third quarter.

“Recent U.S. economic data does not seem to provide much room for the Fed to back away from its high-for-longer rate stance, while China’s upcoming PMI read may still reveal downside risks to economic conditions,” said IG’s Market Strategist Yeap Jun Rong. He pointed out that both seem to cast some near-term reservations for oil prices to follow through with recent gains.

Israeli Prime Minister Benjamin Netanyahu said during a Saturday press conference that Israel has entered its second phase of the war, in what he expects will be “long and difficult” as the country expands its ground operations in the strip.

Oil prices surged late Friday, with Brent jumping above $90 per barrel as Israel said its troops were ‘increasing the ground operation’ in Gaza as it seeks to eradicate the militant group Hamas.

“While a major oil supply disruption is not our base case, the oil market last week became a little too complacent about the likelihood of a major Israeli ground incursion in Gaza, and the risk of a wider regional war,” McNally continued.

Markets are likely to add an additional war-risk premium given the latest developments.

More risk premium may be factored into the price of crude oil this week, McNally forecasts. ANZ echoed similar projections.

“The escalation of the war raises the risk around supply disruptions that have been hanging over the market since Hamas’s attack,” ANZ wrote in a daily note on Monday.

While U.S. crude futures were up only 3.3% since Hamas’ attack on Oct. 7, the potential for a broader conflict to evolve is keeping markets on edge, the bank continued.

While both Israel and the Palestinian territories are not major oil players, the conflict sits in a wider key oil producing region, raising concerns the war could widen beyond Gaza. On Sunday, U.S. National Security Advisor Jake Sullivan said the U.S. sees an “elevated risk” of the conflict spilling over to other parts in the Middle East region.

Particularly, worries about the involvement of Iran have been on the horizon.

Iran is a major oil producer and key backer of Hamas. Israel’s military has accused Iran of ordering attacks by militia groups it supports in Yemen, Iraq and Lebanon, supplying Hamas with intelligence and deploying an online messaging campaign to strengthen anti-Israel sentiment.

Bank of America last week cautioned that any retaliation against Tehran could risk the passage of vessels through the Strait of Hormuz, a vital channel considered to be the world’s most important oil transit chokepoint. If the strait is closed, oil prices can spike above $250 per barrel, the bank said in the note.