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A New War Breaks Out: Assessing the Potential Impact on Oil Prices

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Insights and Market Perspectives

A New War Breaks Out: Assessing the Potential Impact on Oil Prices

Author: Pulkit Sabharwal

October 13, 2023

Israel’s declaration of war in response to Hamas fighters infiltrating its borders this past weekend has so far had only a minor impact on oil prices, but more volatility may be ahead if the conflict spills over to other countries in the region, including, most importantly, Iran, which is alleged to have played some role in the attacks.

Of course, at stake in that scenario is the ongoing supply of oil to global markets. After all, while neither Israel nor the Gaza Strip are significant producers of oil (and therefore have no real bearing on the commodity’s price), Iran is one of the world’s largest production hubs and currently produces three million barrels of crude per day, according to Bloomberg data.

Moreover, Iran’s production has steadily increased over the past year largely because of a “policy of leniency” recently sought by the U.S. government towards the country, which may now be in jeopardy.  

In fact, while Iran has denied involvement in the Hamas attack – and both Israel and the U.S. have said there is currently no concrete evidence of its involvement – it is possible the U.S. might be prompted to support a close ally in Israel and reverse course on sanction leniency with Iran.

In turn, this could result in Iran’s oil supply being taken off the market and/or lead to Iran’s adoption of a “discount barrel” selling strategy that is like what Russia is currently pursuing by striking independent deals with certain countries. This is also a tactic Iran has used previously in the wake of sanctions that followed the onset of the Ukraine conflict.

Israel’s conflict with Hamas also calls into question the general stability of the Middle East and casts a shadow over the recent geopolitical trends seen in the region, namely the apparent normalization of Israel’s relationship with neighbouring Arab states, such as Egypt.

Similarly, there were news stories before the Hamas attack that indicated an arrangement was in the works between Saudi Arabia and Israel, brokered by the United States. As part of that deal, the U.S. was reportedly seeking a one-million-barrel-a-day cut in production orchestrated by Saudi Arabia (and supported by Russian production curtailments of 500,000 barrels a day) to support energy prices.

As such, not only does the onset of this conflict bring into question the directionality and timing of these normalization agreements, but it also arms Saudi Arabia with more leverage in discussions with the U.S., re-affirming its role as the effective “swing producer” in the Middle East and globally, which, crucially, gives it more reasons to keep the production cuts as is.

Beyond that, another factor to consider is the small, but concerning, probability of direct conflict between Israel and Iran. Should this materialize, the risk of a significant portion of the world’s oil supply being taken off the market (owing to Iran’s production numbers) remains a very real one.

Compounding this is the fact that any direct conflict would likely threaten the Strait of Hormuz, a crucial shipping lane that accounts for as much as 1/3rd of global oil and gas shipments. So, while the fighting between Israel and Hamas currently remains far afield from where the majority of oil production takes place in the Middle East, the potential implications (and the non-zero probability) of this conflict escalating and spilling over to other countries like Iran puts a potential floor in place for the price of oil in the near-term, while also adding a degree of upside risk that was not present before this new tragic war broke out.


The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds, or investment strategies.

Commentary and data sourced from Bloomberg, Reuters and company reports unless otherwise noted. The commentaries contained herein are provided as a general source of information based on information available as of October 11, 2023 and are not intended to be comprehensive investment advice applicable to the circumstances of the individual. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Market conditions may change and AGF Investments accepts no responsibility for individual investment decisions arising from the use or reliance on the information contained here.

This document may contain forward-looking information that reflects our current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. 

AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.

® The “AGF” logo is a registered trademark of AGF Management Limited and used under licence.

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About AGF Management Limited

Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. Our companies deliver excellence in investing in the public and private markets through three business lines: AGF Investments, AGF Capital Partners and AGF Private Wealth.

AGF brings a disciplined approach, focused on incorporating sound, responsible and sustainable corporate practices. The firm’s collective investment expertise, driven by its fundamental, quantitative and private investing capabilities, extends globally to a wide range of clients, from financial advisors and their clients to high-net worth and institutional investors including pension plans, corporate plans, sovereign wealth funds, endowments and foundations.

Headquartered in Toronto, Canada, AGF has investment operations and client servicing teams on the ground in North America and Europe. AGF serves more than 800,000 investors. AGF trades on the Toronto Stock Exchange under the symbol AGF.B.

For further information, please visit AGF.com.

© 2025 AGF Management Limited. All rights reserved.

Written by

Pulkit Sabharwal

Pulkit Sabharwal, MBA

Analyst

AGF Investments Inc.

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