Why oil prices spiked on tensions in Gaza and Ukraine

A spike

Early last week, WTI crude oil had eased to close to $99 following Libya’s restarting exports from major ports and abating fears over supply disruptions in Iraq.

But by the end of the week, WTI had spiked back to levels closer to $102. Several factors contributed to this sharp move.

China’s macroeconomic data

On July 15, China reported its second-quarter gross domestic product (or GDP), which grew 7.5 % year-over-year basis in the April–June quarter compared to 7.4 % in the previous quarter. This number not only beat the median estimate of 7.4% but also marked the first acceleration of growth following three quarters of deceleration, as you can see in the chart below.

Stronger economic growth in China, the world’s second-largest oil-consuming nation, would imply higher demand for crude oil.

Plus, China’s implied oil demand (calculated from refining and import data) was reported to have risen 2.6% year-over-year to 10.2 million barrels per day (or bpd) in June. This was the highest figure in 17 months.

Ukraine

Prices also climbed after the U.S. government, on Wednesday, July 16, imposed tougher sanctions (penalties in the form of foreign policy, or economic pressure) on Russian banks and energy companies. The affected companied included OAO Rosneft, Russia’s largest oil company. The U.S. condemned Russia for its continued support of rebels in Ukraine.

A supply disruption due to a confrontation or as an economic weapon against these sanctions would cause prices to rise. Russia is one of the world’s top producers and exporters of oil and gas.

After the imposition of sanctions, fresh tensions surfaced after a Malaysian Airlines passenger plane crashed in Ukraine. About 300 people are feared to have died in the crash. Some news reports suggest the aircraft may have been shot down with an air missile.

Gaza

Plus, as Israel announced a ground offensive into Gaza on Thursday, July 17, oil prices rose further.

Although the Gaza Strip is a long way from any oilfields, an altercation reminiscent of the 1970s could draw neighboring oil-producing countries in, affecting oil supplies.

Prices

WTI prices closed at $103.35 per barrel on Thursday. This number was ~2.5 % higher than the prior week’s levels.

Crude oil prices affect earnings for major oil producers such as Chevron (CVX), ExxonMobil (XOM), and Hess Corporation (HES). These companies are major components of energy exchange-traded funds (or ETFs) like the Energy Select Sector SPDR (XLE) and the Vanguard Energy ETF (VDE).

While oil prices rose, natural gas prices fell

Continue to the next part of this series to find out about natural gas price movements last week.