RBC Capital's take on Hamas/Israel impact on oil market

[dan_s]

From RBC Capita on October 8, 2023
Helima Croft, Head of Global Commodity Strategy and MENA Research

Israel-Hamas: The Coming Days
Situation Update and Analysis Amid Hamas Attacks on Israel

The situation on the ground in Israel remains very fluid following the unprecedented Hamas
attacks that fall on the 50th anniversary of the Yom Kippur War. Nonetheless, we will be
monitoring several key regional dynamics that will undoubtedly be affected by these attacks in
the coming days, including the impact on the US diplomatic effort to secure a grand bargain with
Saudi Arabia, as well as the potential fallout with Iran.

The US-led effort to secure a sweeping diplomatic reset with Saudi Arabia appears to be in a
very precarious place following yesterday’s deadly events. The Saudi leadership has insisted
on Israel making significant concessions to the Palestinians as part of any normalization
agreement and given what has transpired, it is very difficult to envision a government that is
now on war footing to agreeing to such terms. Since Wednesday, there has been significant
background noise about an imminent diplomatic agreement and potential Saudi energy
deliverables to the Biden administration.

We have been highlighting since the beginning of September that there has been clear
movement towards reaching a mega deal, which would encompass Israeli normalization,
civilian nuclear assistance, new security guarantees, and potentially energy support.
Nonetheless, we continued to contend that success was by no means guaranteed and that
there were critical outstanding issues that required resolution. There has been a range of
responses from the Gulf states to the unfolding events. The Saudi government for its part called
for both sides to immediately halt the escalation and demonstrate restraint, but stated that it
had made “repeated warnings of the dangers of the explosion of the situation as a result of the
continued occupation, the deprivation of the Palestinian people of their legitimate rights, and
the repetition of systematic provocations against its sanctities.” The Israeli government is
vowing an unprecedented response and it is hard to envision how Saudi normalization talks can
run on a parallel track to a ferocious military counter offensive.

Iran remains a very big wild card and we will be watching how strongly Prime Minister
Netanyahu blames Tehran for facilitating these attacks by providing Hamas with weapons
and logistical support. Throughout the year, Israeli officials that we have spoken with have
expressed a growing sense of isolation and have questioned whether traditional allies, such as
the United States, share the same concerns about Iran’s nuclear program and its support for
armed groups in the region. While the White House has continued to criticize Iran for
human rights abuses as well as its provision of weapons to Hamas, Hezbollah, and
Russia, it has also adopted a soft approach to sanctions enforcement that has allowed the
country to approach pre-2018 levels of oil production. If Israel comes out and directly
implicates Iran, we believe it will likely be difficult for the Biden administration to continue
to adopt such a permissive sanctions regime. We anticipate that critics in Congress and
elsewhere will contend that the White House is providing Iran with the financial
wherewithal to sponsor such malign actors.

In addition, we anticipate that Israel will escalate its long running shadow war against
Iran; which has entailed assassinations of nuclear scientists and military commanders,
mysterious explosions at key nuclear and weapons facilities, and cyber-attacks on
critical infrastructure sites. What is unpredictable is how Iran would respond to such an
intensification and whether this ceases to be a purely covert conflict. Multiple US
administrations have sought to stave off a direct Israeli attack on Iran, fearing a wider
conflagration. Covert or overt, the White House will likely come under significant pressure
to support Israel given the scale of what has transpired, and an administration that has
endeavored to avoid being dragged into another Middle Eastern conflict may find itself in
the middle of one depending on what transpires in the coming days