Geographically speaking, the recent clashes between Israel and Gaza should not have affected oil prices. This is because neither Israel nor Gaza possess proper land which sits on oil.
Regardless, oil prices went up. That is because of reasons we know all too well by now. Any conflict in the Middle East scares investors, as they worry about the safety and whims of nearby oil producers. It was therefore no surprise that the price of oil climbed during the recent skirmish between Israel and Gaza, and came back down soon after the ceasefire was signed.
When Operation Pillar of Defense began (with the killing of Hamas Military Commander Ahmed Jabari), Forbes pointed out that oil ticked up, but only a small amount. The ensuing chaos and tit for tat resulted in a significant rise, and only after a ceasefire was signed and seemed to hold up did oil come back down.
In a linear world in which supply and demand were the only factors involved, I would agree. But with a still-smoldering Middle East, I am nearly ignoring the increased rates of U.S. oil production and stockpiles.
The Israel/Gaza conflict highlighted the notion that a small spark in the Middle East always has the potential to burst into a conflagration. So much so that warships were sent into the region by the two biggest superpowers in the world. The U.S. sent two naval vessels to Israel's coast with the objective of evacuating U.S. citizens in case fighting escalated. It should be noted, however, that it was not lost on anyone that the two naval vessels sent had impressive military capabilities. Combine that with U.S. troops in Jordan, and one can see legitimate U.S. fears of a large scale eruption in violence. And perhaps not to be outdone, Russia sent its own warships off the coast of Gaza.
Even if only for a week, the world seemed awfully worried about the Israel/Gaza conflict. With a constant fear that one incident can burst into full scale war between many parties with many oil refineries in tow, oil prices are always in a perilously delicate state. This fear of escalation is legitimate, as the ceasefire seemed to crack before the ink dried.
Were one to discount further potential Israel/Gaza clashes, he or she need only look further North or South, depending on one's preference. In the North, Syria is still in all out war against rebels. And in the South, Egypt's President Morsi recently issued a startling decree which could be the catalyst for more instability--this time in a country rich with oil.
The Arab Spring produced higher oil prices, and contrary to popular belief, this same spring has not yet subsided, and oil is still being affected. Morsi's declaration of new powers are sure to rile up a disbelieving public who voted him into power after storming the previous administration for the very same abuses of power. The Egyptian public ousted one ruler, and they can certainly do it again.
Demonstrations are already underway, and the world will be watching closely. United States Oil (NYSEARCA:USO) hit a high of $42 in the immediate aftermath of Mubarak's getting overthrown. As Egyptian unrest returns and the demonstrations get underway, the question isn't whether or not oil will rise, but rather how much. Because, as we've learned time and time again, when the Middle East clashes, the rest of the world drinks its oil.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in USO, UCO over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.