Middle East politics are almost always predicated on oil. .The latest conflagration between the Israelis and Palestinians is no exception, underscoring cracks in a creaky alliance of oil producing Gulf states and major geopolitical players including the US and Russia that has the potential to wreak havoc on world oil markets, including Canada..After rising more than 5% on the weekend, oil prices settled back around US$87 on Monday as traders took a wait-and-see attitude to rapidly unfolding developments in ancillary countries bordering the Persian Gulf — namely, Saudi Arabia and Iran — which is the source of more than a third of the world’s crude supplies..That’s because the latest unrest comes as US President Joe Biden was reportedly set to broker normalization agreements between Israel and the Saudis, following a similar deal with the United Arab Emirates (UAE), Bahrain and Morocco in 2020..That appears to be clearly off the table, for now. .Prior to the attacks, the US had been easing sanctions on the Islamic Republic as it pursues a renewed nuclear deal. If Iran has been determined to have aided the assault on Israel — which seems likely — oil traders worry Biden will once again slap crippling sanctions on the world’s fourth largest oil producer, causing prices to spike and potentially unleashing crippling inflation around the world..“If reports of Iran’s involvement turn out to be true, this would provide another boost to prices, as we would expect to see the US enforcing oil sanctions against Iran more strictly,” wrote Dutch Bank ING on Tuesday. “That would further tighten an already tight market.”.On that front, reaction from Gulf oil producers was decidedly split; the UAE and Bahrain condemned the Hamas attacks while Kuwait and Qatar criticized Israeli policies in the Gaza Strip for sparking the violence..A statement from the Qatari department of information and communication held “Israel alone responsible for the escalation now underway due to its ongoing violations of the rights of the Palestinian people, most recently the repeated incursions into the blessed Al-Aqsa Mosque under the protection of the Israeli police.”.The Kuwait foreign ministry called on the international community to "stop the provocative practices by the occupation," and the "policy of expanding settlements," according to a Google translation..Bahrain, meanwhile, warned “the attacks launched by Hamas constitute a serious escalation that threatens the lives of civilians, expressing its deep regret for the great loss of life and property and its condolences to the families of the victims.”.Bahrain isn’t a big oil producer in its own right, but it is a major transit point for Saudi exports through the Strait of Hormuz that borders Iran..For its part, Saudi Arabia said it had issued repeated warnings of a possible escalation in light of "the ongoing occupation and the deprivation of the Palestinian people of their legitimate rights, as well as the repeated deliberate provocations against their sanctities.”.There was no indication it intends to cut oil production any further than the previously announced 1 million barrels per day OPEC+ reductions it plans to extend to the end of the year..Although Israel, and by extension the Palestinian territories, are neither major oil producers — or even consumers — most observers agree the unfolding developments in the Holy Land will have a long term impact on prices and the future of the global economy..Saudi had been pulling into the Russia-China orbit in recent months after it formally joined the BRICS trading bloc in August. Normalizing ties with Israel was seen as a foreign policy coup that would have aligned the world’s largest oil producer firmly with the West and away from a rogue coalition with Iran .
