Fears of an Israel-Hezbollah War Leave Oil Markets on Edge

While Putin was hoping his visit to Kim Jun-Il and a timely defense pact with North Korea would create more of a fuss in the media, center stage has been consumed by Israel and Lebanon, on the brink of war, or so is the fear. 

For weeks, Israel and Hezbollah have been trading air strikes and rocket launches across the Israel-Lebanon border, with the situation escalating this week to the point that they are one concrete strike away from a declaration of all-out war. The likelihood is fairly high now that this will be the case, similar to the war between the two in 2006, only most observers agree that this time around it will be more devastating due to the military buildup by both Israel and Hezbollah over the past eight years. 

On Wednesday, Israel’s Northern Command approved plans for war with Lebanon, prompting Hezbollah to threaten that none of Israel would be spared from Hezbollah rockets. On Thursday, a Saudi diplomat warned Israel not to provoke a war in Lebanon, specifically sending a message that there would be no normalization of Israel-Saudi ties without a just solution for Palestinians, as well. The Saudis have expressed concern, as well, that this time around an Israel-Lebanon war will not remain confined to the region. 

Just as important is what is going on inside Israel right now. Netanyahu disbanded his war cabinet on Monday, after his biggest rival, Benny Gantz, withdrew from the cabinet in protest over the handling of the war. Gantz was a moderate. Now Netanyahu has more control, and chances of a ceasefire are less realistic. Far-right members are also gunning for war with Lebanon. With a war cabinet full of hardliners, and those people facing the immediate threat from Hezbollah’s rockets in northern Israel are their supporters. 

What about Iran? An all-out war between Lebanon and Israel would remove some leverage from Tehran, for whom Hezbollah is a looming threat if Israel were to attack Iranian nuclear facilities, for instance. Once a war is in full swing, that threat is no longer leverage; yet, Iran will have to respond, by proxy or otherwise. Israel’s Western allies could be dragged into the melee, depending on the size and scale of the escalation. Coming to Israel’s rescue in this case would threaten all of Washington’s work at normalizing relations in this region–work that started in earnest under the Trump administration and has gained considerable momentum under the Biden administration. A war with Lebanon could call everything off if it fails to remain regional, as it was in 2006.

It’s all making the markets jittery, and uncertain (in the case of oil and gas) to rally on the potential for an expanding war to disrupt more supply and the prospect of interest rate cuts, or refocus on demand, which itself is the subject of heated debate.