Oil traders closed some of their positions last week at risk premiums formed since the beginning of the year, but more and more people are worried that Israel's invasion of Rafah will be a foregone conclusion, which has exacerbated oil price fluctuations.

Rob Thummel, senior portfolio manager at Tortoise Investments, said the Rafah incident would not directly affect the physical oil market; however, “increased uncertainty related to possible retaliation by Iran could reintroduce a geopolitical risk premium into oil prices.”

Hamas agreed to a draft cease-fire agreement including Israel's complete withdrawal from Gaza, according to news on Tuesday. The Israeli side responded that the agreement was far from Israel's demands. During the war, the cabinet unanimously decided to continue military operations in Rafah, but continue negotiations on a cease-fire. Earlier, the Israeli military warned of the evacuation of civilians in eastern Rafah.

Anas Alhajji, an independent energy expert and managing partner of Energy Outlook Advisors, said that recent changes in oil prices have been limited, and part of the impact stems from concerns that Iran-backed Houthi rebels may increase attacks on oil tankers in the Red Sea region. In late April, according to foreign media reports, the Houthis claimed that they used drones to attack a container ship in the Indian Ocean to show support for the Palestinian people and opposition to Israel's military action in the Gaza Strip.

As far as oil is concerned, “everything depends on how the Houthis and other countries respond to the Rafah incident,” Alhajji said. “Without such a response, any short-term spike would be short-lived.”

The rekindling of war between Israel and Hamas may also affect the progress of the agreement between Saudi Arabia and Israel to normalize relations.

According to a foreign media report, the Biden administration urged Israel not to launch large-scale ground operations in Rafah, fearing that this move would not only hurt civilians, but also further isolate Israel's position in international public opinion, especially during the sensitive period of talks with Saudi Arabia on post-war arrangements and normalization of the Gaza Strip process. According to reports, the Biden administration is trying to broker an agreement between Saudi Arabia and Israel to push Israeli Prime Minister Binyamin Netanyahu to accept the promise to establish a Palestinian state in exchange for Saudi diplomatic recognition. Meanwhile, the White House proposed to Saudi Arabia to establish a more formal defense relationship.

Helima Croft, head of RBC Capital Markets' Global Commodity Strategy and Middle East and North Africa research, wrote in a May 2 report that Saudi officials insist that normalizing relations with Israel is still on the agenda, but “only if there is a credible path to the establishment of a Palestinian nation and an end to the war.” As such, they saw it as a question of “Israel would rather have Rafah or Riyadh (Saudi capital)”.

Croft pointed out that it is currently difficult to see how to advance the process of normalizing relations between Israel and Saudi Arabia when Netanyahu has hinted that the Rafah offensive is imminent and has not shown a will to restart discussions on the establishment of a Palestinian nation.

She also mentioned that although energy aid was not explicitly part of negotiations to normalize relations between Saudi Arabia and Israel, there was an “implicit assumption” last fall that Saudi Arabia would be more willing to respond to requests from Washington to increase (oil) production if an agreement was reached. This is particularly important for the US, which is facing presidential elections later this year.

On Monday, Saudi state-owned oil giant Saudi Aramco raised prices for some customers in Asia and all customers in northwest Europe and the Mediterranean in June, but made no adjustments for US customers. Analysts believe that the price increase indicates that Saudi Arabia is not concerned about the potential weakening of oil demand.

Currently, Angie Gildea, head of KPMG's US energy business, said that oil prices will continue to reflect the evolving geopolitical situation to a certain extent.

However, she also pointed out, “Unless there is a physical event that may disrupt supply or affect major trade routes, the traditional view is that there is enough idle production capacity to offset the continued high level of oil prices.”