What The Endgame in Gaza Means For Middle East Security And Oil Prices

Yves here. We occasionally post articles by Simon Watkins, as we do today, to give readers a window into hard-core neocon thinking with respect to the Middle East. Remember, Watkins is not creating his assessments from whole cloth. His contacts really do believe, for instance, that Israel really does have the capacity to eliminate every major Iranian nuclear site that supports potential weapons development. Most readers know that many experts who appear to be very knowledgeable about the region contend the opposite, that Iran’s key nuclear enrichment sites, as well as many many sites with conventional missiles, are so deep underground as to be out of the reach of even a nuclear attack. Yet Watkins continues to depict his assessment as reasonable by working from a 2012 (no typo) Congressional Research Service analysis. Help me.

Nevertheless, he makes two points worth considering. One is that it is politically necessary for Netanyahu to proceed with an aggressive clearing of Gaza. He will hold off until Trump has completed his Middle East tour. Two is that Watkins contends that if the Israeli attack is ugly enough, OPEC members might re-run their 1970s embargo. As much as the resulting high prices would particularly hurt poor households, the resulting economic damage on top of tariff-inflicted pain would be a fitting punishment for the US and Trump in particularly for doing squat to stop the monstrous genocide in Gaza and intensified ethnic cleansing in the West Bank.

The spectre of starving children appears to have generated yet more well-warranted hostility towards the genocide…even in Israel:

In Jerusalem tonight, people holding photos of Palestinian children killed in Gaza. This specific form of protest is getting bigger every week now. Enough. pic.twitter.com/Fb2V9BgAQ4

— Ami Dar (@AmiDar) May 10, 2025

And in another wild card, internal opposition to Netanyahu’s escalation track is increasing at senior levels in Israel:

In Jerusalem tonight, people holding photos of Palestinian children killed in Gaza. This specific form of protest is getting bigger every week now. Enough. pic.twitter.com/Fb2V9BgAQ4

— Ami Dar (@AmiDar) May 10, 2025

By Simon Watkins, a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for Credit Lyonnais, and later Director of Forex at Bank of Montreal. He was then Head of Weekly Publications and Chief Writer for Business Monitor International, Head of Fuel Oil Products for Platts, and Global Managing Editor of Research for Renaissance Capital in Moscow. Originally published at OilPrice

• Israel prepares major Gaza operation that may forcibly relocate civilians and risks escalating regional tensions.
• Geopolitical flashpoints intensify, with Israel reportedly ready to strike Iranian nuclear sites.
• World Bank warns a large Middle East supply disruption could drive oil prices up by 56–75%.

The next phase of Israeli Prime Minister Benjamin Netanyahu’s plan for Gaza could well be the beginning of the endgame of the ongoing Israel-Hamas War that poses the most danger for the global oil market. According to his statement on 5 May, he said that Israel was “on the eve of an intense entry into Gaza,” and that once the tens of thousands of extra Israel Defense Force (IDF) troops drafted for the mission are in the territory, “they will not enter and come out”.

At the same time as the new IDF offensive against Hamas in Gaza is taking place, Israeli soldiers will force some, or all, of the more than two million Palestinian civilians in Gaza into a small area in the south. Humanitarian aid will then be distributed through private companies, as the United Nations’ agencies have said they will not cooperate because they regard the plans as violating the principles of humanitarian aid. Although aimed at freeing the remaining 24 living hostages in Gaza and repatriating the bodies of a further 35 of the 251 hostages taken during the 7 October 2023 attacks on Israel by Hamas, some see this latest Israeli manoeuvre as the permanent replacement of Palestinians with Israeli settlers.

The precise timing of this plan depends on the eventual outcome of U.S. President Donald Trump’s upcoming visits to the key Arabic states of Saudi Arabia, the United Arab Emirates, and Qatar. However, there is little doubt that the new plan for Gaza will be rolled out soon in any event, according to several Middle Eastern security sources exclusively spoken to by OilPrice.com since Netanyahu’s 5 May statement. “Netanyahu has been told by his key parliamentary backers that if he doesn’t go ahead, they’ll bring him down,” said one of the London-based sources last week.

If Trump is unsuccessful in fully persuading the three Arab nations that their best interests are served by staying out of the intensifying drama in Gaza, then one course of action that may well result is an embargo on oil exports from OPEC of the sort that prompted the 1973/74 Oil Crisis, as analysed in full in my latest book on the new global oil market order. Indeed, the parallels between the onset of the current events in the Middle East and those that preceded the 1973 Oil Crisis are uncanny. Back then, the Egyptian military moved into the Sinai Peninsula, while Syrian forces moved into the Golan Heights — two territories that had been captured by Israel during the Six-Day War of 1967 — on the holiest day of the Jewish faith, Yom Kippur. This was the same multiple-direction attack method and religious date as the 7 October Hamas attacks used 50 years later by Hamas on targets across Israel.

The 1973 attack by two major Arab states on Israel then drew in further Islamic countries in the region as the conflict became one centred on religion rather than simply regaining lost territory. Military and other support came to Egypt and Syria from Saudi Arabia, Morocco, Algeria, Jordan, Iraq, Libya, Kuwait, and Tunisia before the War ended on 25 October 1973 in a ceasefire brokered by the United Nations.

However, the conflict in its broader sense did not end there. An embargo on oil exports to the U.S., the U.K., Japan, Canada, and the Netherlands was imposed by key OPEC members, most notably Saudi Arabia, in response to their collective supplying of arms, intelligence resources, and logistical support to Israel during the War. By the end of the embargo in March 1974, the price of oil had risen around 267%, from about US$3 per barrel (pb) to nearly US$11 pb. This, in turn, stoked the fire of a global economic slowdown, especially felt in the net oil importing countries of the West.

There is also Iran’s response to consider, given that Hamas is one of its key proxies in the region. Up until relatively recently it had still been engaged in an escalating series of tit-for-tat military strikes against Israel and had warned that more would come depending on the severity of the way in which Israel dealt with its key regional proxy Hamas in Gaza. Israel on the other hand has long threatened to end the ever-closer threat of Iran possessing nuclear weapons by launching direct attacks on its major nuclear facilities.

Donald Trump has repeatedly made it clear that he would be in favour of such strikes. On 4 October, the then-presidential candidate said that: “Israel should hit the nuclear [facilities] first and worry about the rest later.” In response to then-U.S. President Joe Biden’s refusal to endorse the idea of Israeli attacks against these Iranian sites following Tehran-directed attacks against Israel, Trump added: “That’s the craziest thing I’ve ever heard. That’s the biggest risk we have. The biggest risk we have is nuclear … Soon they’re going to have nuclear weapons. And then you’re going to have problems.”

Israel has long possessed a full military operations plan to attack and destroy every major site in Iran connected to the development of a nuclear weapons capability. Some of this would be done through a combination of technology and human intelligence, while a larger element would have to be executed through air strikes. A U.S. Congressional Research Service (CRS) Report from 2012 analysed striking Iran’s Natanz, Esfahan, and Arak nuclear sites or similar targets in logistical terms would probably require 90 tactical fighters, although — assuming around a 10% margin for reliability — 100 would be needed.

Back at the time of the report Israel had around 350 fighter jets, and the number has risen considerably since then. To work around the potential problem of Israeli aircraft crossing the sovereign airspace of Saudi Arabia, Jordan, Iraq, and/or Syria, the Report added that the aircraft could overfly NATO-member Turkey to reinforce its assets in Azerbaijan and use that as a staging post.

That said, there is every indication that Israel significantly expanded its military assets in Azerbaijan following the Nagorno-Karabakh conflict escalation in 2023. As for the weaponry required to take out some of the deepest underground sites, the CRS’s 2012 report highlighted that the U.S. had already sold Israel Guided Bomb Units (GBU) of the ‘27’ 2000-lb class and the ‘28’ 5000-lb class. Israel used the U.S.-made 2,000-pound BLU (Bomb Live Unit)-109 penetrator bombs to kill Hezbollah chief Hassan Nasrallah on 27 September last year. Although his bunker was only 100 feet underground compared to the 300 feet+ of some of Iran’s nuclear installations, the Report added in 2012 that: “The U.S. may have quietly given Israel much more sophisticated systems or Israel may have developed its own.” Aside from these logistical considerations, a telling fact remains that Iran clearly thinks Israel could pull it off, as in April 2024 — shortly after the Iranian missile attack on Israel — Tehran closed its nuclear facilities.

Any further and sustained significant decreases in oil supply resulting from OPEC members and/or additional disruption to the Middle East’s key oil shipping routes could have extreme consequences for the oil price. 

At the early stages of the initial Israel-Hamas conflict the World Bank laid out a range of scenarios for the oil price according to a gradation of risks. It stated that a ‘small disruption’ – with the global oil supply being reduced by 500,000 to 2 million bpd (roughly the same as the decrease seen during the Libyan civil war in 2011) – would see the oil price initially rise 3-13%. A ‘medium disruption’ – involving a 3 million to 5 million bpd loss of supply (roughly equivalent to the Iraq war in 2003) would drive the oil price up by 21-35%. And a ‘large disruption’ – featuring a supply fall of 6 million to 8 million bpd (like the drop seen in the 1973 Oil Crisis) – would push the oil price up 56-75%.