FTSE 100 oil majors: BP and Shell shares could rise as Israel-Hamas war intensifies

FTSE 100 oil investors may be getting an eerie sense of déjà vu. Russia’s invasion of Ukraine — in reality an escalation of pre-existing hostilities — echo the intensifying war between Israel and Hamas. Oil and gas prices shot up in the immediate aftermath, and a similar scenario could be about to play out.

Of course, this new escalation is nothing new. Fighting has been ongoing in this corner of the Middle East going as far back as the 1948 Arab Israeli War when Israel was found, or even a millennium further back during the crusades.

Accordingly, the caveat with any analysis of the Middle East is that it’s almost impossible to understand every facet of any conflict. Different actors with different motivations proliferate through every country — whether Lebanon, Yemen, Syria — or the power players in the region including Israel, Saudi Arabia, and Iran.

But the key point, where analysts concur, is that escalation is where the real danger lies. And where investors had hoped that de-escalation would happen over Sunday, the opposite seems to have occurred.

FTSE 100: Israel-Hamas War

It is not possible to cover all developments, but some of the key issues include:

• More than 1,400 people were killed by Hamas in Israel when fighters crossed the border, including both soldiers and civilians
• More than 2,450 people have been killed by Israel’s bombing of Gaza
• Israeli troops are massing on the Gaza border ahead of an expected ground attack
• Israel has told 1.1 million Palestinians in North Gaza to evacuate to the south
• Israel has turned the water back on in southern Gaza
• The UN argues that Gaza is seeing an ‘unprecedented human catastrophe’
• Five US Senate members are in Tel Aviv to meet with top officials, and have been forced to shelter from Hamas rockets
• US Secretary of State Anthony Blinken has asked Israel to avoid harming civilians as much as possible

Clearly, there are huge ethical queries over the extent to which Israel can respond to the attacks on its soil — and pressingly, whether this next step could escalate relatively localised fighting into a regional war, backed by multiple proxy agents.

For some context, consider the Syrian war — Russia and Iran supported President Bashar al-Assad, while the west and Saudi Arabia supported various rebel groups. Then there’s Yemen, which is under continual conflict as the Saudi Arabia-backed government comes under attack from Iranian-backed Houthi rebels.

In the milieu, Egypt is still trying to recover from the 2014 military coup, Lebanon remains in economic crisis, and then there’s Iraq, Iran, and Turkey to consider. It’s not hard to see why escalation could become a problem — with Israel also vowing to ‘destroy’ Lebanon if the war spreads.

Over the weekend, two members of Hamas and Hezbollah told the Wall Street Journal that the attack had been planned in meetings with the Islamic Revolutionary Guards Corps of Iran — and the witnesses claim that the final go-ahead was given by Iran in Beirut last Monday. Iran has denied any involvement.

Key actors

At present:

• Israel — Israel Defence Forces (IDF) plan to enter the Gaza Strip, with Lt Gen Herzi Halevi arguing that the ‘responsibility now is to enter Gaza, to go to the places where Hamas is preparing, acting, planning, launching. Attack them everywhere, every commander, every operative, destroy infrastructure’
• The US — The Pentagon has ordered two aircraft carrier strike groups to the eastern Mediterranean near Israel to deter Iran or Hezbollah from joining the Israel-Hamas conflict. White House national security adviser Jake Sullivan has warned that ‘there is a risk of an escalation of this conflict, the opening of a second front in the north and, of course, Iran's involvement.’ US President Biden is reportedly considering a visit to Israel
• Saudi Arabia — the foreign ministry has denounced Israel as ‘occupation forces’ and said that Hamas acted as a ‘result of the continued occupation and deprivation of the Palestinian people of their legitimate rights’
• Iran — foreign minister Hossein Amir-Abdollahian has made several dire warnings, including that ‘if the Zionist aggressions do not stop, the hands of all parties in the region are on the trigger.’ Hamas leader Ismail Haniyeh met with the minister on Saturday in Qatar, where they ‘agreed to continue cooperation’ to achieve the group's goals, Hamas said in a statement

FTSE 100 oil major implications

There are many markets that could be affected by the war — but the most immediate are oil and gas. For context, European wholesale gas prices had already hit a seven-month high on Friday — and Brent Crude remains elevated at circa $91 per barrel.

Blinken had noted that thawing relations between Saudi Arabia and Israel could have been a motivator behind the original Hamas attacks. For perspective, a US-backed plan for Saudi Arabia to formally recognise the state of Israel and increase its oil production, in exchange for increased US military aid and increased political support, could now be essentially sunk.

Had Saudi, which had previously agreed to restrict its oil production alongside other OPEC cartel members, agreed to increase oil production, then the rest of the OPEC cartel could have followed. There is now an opportunity for the cartel to squeeze prices even higher.

Further, the tentative nuclear deal being drawn up between the west and Iran may now break down, making increased oil output from the country unlikely as well.

The bigger problem is the Strait of Hormuz — which contains eight major islands — seven of which are controlled by Iran. The EIA considers the Strait to be the world’s most important oil chokepoint, with the Strauss Center thinking that oil tankers carry 17 million barrels of oil, representing 20-30% of global daily consumption, through the Strait each day. Any disruption could see oil rise sharply.

In addition, the Baltic-connector gas pipeline between Finland and Estonia was damaged late last week with investigators finding the rupture was caused by mechanical force. Russian President Putin has denied involvement, but Finnish officials cannot rule out state actor involvement. NATO has promised a ‘determined’ response — and the timing is clearly questionable.

Oil prices, and the FTSE 100 oil majors BP and Shell could well rise on Monday.