Flaring Tensions: Israel-Hamas Conflict’s Global Trade Ripples and Oil Price Surge

The recent surprise attack by Iran-backed Hamas on Israel, resulting in over 1,000 casualties, has raised concerns about its potential repercussions on global trade, particularly India, and the oil market.

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Global Trade Impact:

This sudden escalation in geopolitical tensions has reversed the recent fall in oil prices, stoking inflationary concerns. Additionally, the conflict has had broader impacts on global trade and financial markets. Stock markets globally have experienced volatility, with investor sentiment affected by geopolitical uncertainty. Safe-haven assets like gold have seen increased demand, reflecting risk aversion in the investment landscape.

India’s Trade Relations:

The immediate impact of the Israel-Hamas conflict on India’s foreign trade is limited. The geographical scope of the conflict is confined, allowing Israel to continue using its ports without disruption. The biggest Israeli port, Haifa, is over 150 km away from Gaza, while the second-largest, Ashdod, is even further inland. India’s primary trade route with Israel goes through the Eilat port on the Red Sea, which has experienced no disruptions. During FY23, India’s exports to Israel increased significantly, recording a 76.2 per cent year-on-year growth to reach $8.4 billion. 

This surge was driven by petroleum product exports, making India a major processor of cheaper Russian crude, and Israel has become the second-largest market for Indian automotive fuel exports. In contrast, India’s imports from Israel primarily consist of machinery and equipment, pearls, diamonds, and other precious and semi-precious stones. In FY23, India’s imports from Israel were $2.3 billion, reflecting a 24.4 per cent year-on-year decrease.

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Oil Price Impact:

The Israel-Hamas conflict has driven up oil prices significantly, with Brent crude oil futures rising by approximately 5 per cent to $88.76 a barrel, and US WTI crude increasing by 5.1 per cent to $87.02 a barrel. These price spikes are a direct result of concerns about potential disruptions in the major oil-producing region.

Short-term Outlook:

In the short term, oil prices may experience a notable 10-12 per cent increase due to the immediate reaction to the conflict. The US, in support of Israel, may release its oil reserves to stabilize prices and control inflation. This measure is also aimed at preventing Russia from benefiting from higher crude oil prices. Historical data shows that following geopolitical events, such as the outbreak of conflict, oil prices often experience initial spikes that tend to stabilize over time. Therefore, while short-term volatility is expected in the oil market, it’s crucial to monitor how the situation evolves and its ongoing impact on oil markets.

Takeaway: The Israel-Hamas conflict has led to a significant surge in oil prices and introduced uncertainty into global financial markets. While India’s trade has not been significantly affected at this stage, the broader impact on global trade and financial markets is a subject of concern. Monitoring the situation’s evolution remains critical, as it could affect investor sentiment and economic stability worldwide.

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