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By Jack Farchy
Oil prices rallied more than $2 a barrel on Monday amid escalating violence in the Middle East and hopes of a deal to avert the US fiscal cliff.
The price of benchmark Brent crude oil rose as much as $2.39 a barrel, or 2.2 per cent, to touch $111.34 – the highest in nearly two weeks.
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The rally came in spite of a bearish consensus among oil traders, who believe the prospect of continued increases in production from the US and Iraq, combined with muted global economic growth, will weigh on prices next year.
But the fresh wave of violence that erupted last week between Israel and Hamas has reminded traders and investors of the oil market’s continued vulnerability to a Middle Eastern supply disruption.
Even though neither Israel nor the Palestinian Territories is a significant oil producer, investors fear that the tensions could spread to other countries in the region and affect oil exports.
“In an environment where spare capacity is limited and key suppliers are stretching themselves to fill the plurality of shortfalls, geopolitically driven upside risks to oil prices are increasingly outweighing the downside risks,” analysts at Barclays said.
Iraq’s representative to the Arab League on Friday suggested that Arab nations should use oil as a weapon to put pressure on Israel, according to Reuters, although he later retracted the statement.
The oil market is already strained by the sanctions on Iran, which have caused the country’s production to fall to a 22-year low.
Prices were also lifted by optimism in the wider markets about the possibility of a deal among US politicians to avert a series of automatic tax increases and spending cuts that could drive the economy into recession.
Republican and Democratic leaders described the latest talks on the fiscal cliff – one of the chief concerns for investors – as “constructive”.
