Oil Markets on Edge as Israel Prepares for an Iranian Retaliation

Wall Street is more nervous this week than it was last week, with U.S. benchmark oil prices gaining 3.5% at one point on Wednesday, as Israel (and everyone else in the region and beyond) waits for a response from Iran in retaliation for the assassination of Hamas’ Haniyeh on Iranian territory, which Israel has not yet acknowledged. 

Israel is shoring up its internal defenses for war. The panic has begun. Flights over Iranian and Lebanese airspace are being avoided, amid growing fears of a regional military conflict. United Airlines suspended flights to Tel Aviv on Thursday. Canada is evacuating all of its diplomats’ children. Iran itself warned airlines against using its airspace for three hours on Thursday as it launched military drills. 

And peace talks are now even more elusive, with Hamas’ move to replace Haniyeh with wanted militant Yahya Sinwar as the new political leader. This means that Hamas’ militant and political wings are now irretrievably united. Ceasefire negotiations will now be far more complicated, and Sinwar is expected to resist budging in negotiations. Hamas has just officially been rendered more extreme, and according to Arab media, Sinwar was the mastermind behind the October 7 attacks and has since been hiding out in Gaza’s tunnels. 

So far, there has not been any movement by Iran except through its proxies, including an attack on Wednesday by Syrian military forces backed by Iran against Kurdish militias in eastern Syria–an oil-producing area under the protection of U.S. forces, more or less. Earlier in the week, at least five U.S. military personnel were wounded in an attack on a military base in Iraq. 

An attack on Israel or Israeli allies could come from many corners of the region, including Hezbollah, Iran’s main proxy, which could retaliate on Tehran’s behalf or even without Iran’s blessing should it feel that Tehran is dragging its feet on an appropriate response. The U.S., Egypt, and Qatar are pushing to restart peace talks on August 15, but Sinwar (whereabouts still unknown) told The National on Thursday that there would be no compromising for Hamas. Sinwar also said that Hamas would under no circumstances agree to any post-war deal that led to the Palestinian Authority taking control in Gaza. The change in stance after vows of unity between Hamas and Fatah just prior to Haniyeh’s assassination in Iran will soon begin to raise questions about who orchestrated the assassination, keeping in mind that the Israelis have not yet claimed responsibility.

Late on Thursday, Syrian state media reported an Israeli air strike in central Syria, in which four Syrian soldiers were wounded. Israel also intensified airstrikes in Gaza on Thursday, killing 40 people.