Amidst rising tensions in the Middle East, oil markets have experienced volatility. Israel's deployment of ground forces into the Gaza Strip has not led to the expected surge in oil prices, as investors remain focused on the upcoming US Federal Reserve monetary policy meeting.

Global benchmark Brent crude oil price saw a decline of 1.06%, falling to $89.52 per barrel. Simultaneously, US West Texas Intermediate (WTI) crude oil price dropped by 1.16%, reaching $84.55 per barrel.

The Federal Reserve is anticipated to maintain existing interest rates at its forthcoming two-day meeting scheduled for later this week. This decision follows the backdrop of the US economy's robust 4.9% annual growth rate in the third quarter.

Israeli Prime Minister Benjamin Netanyahu, in a press conference held on Saturday, declared that Israel had entered a second phase of the conflict. He foresees a "long and difficult" campaign as the nation expands its ground operations in the Gaza Strip. Oil prices experienced an upward surge on Friday, with Brent crude briefly surpassing the $90 per barrel mark.

However, some analysts have pointed out that the oil market may have underestimated the likelihood of a substantial Israeli ground incursion in Gaza and the potential for a broader regional conflict. While US crude futures have seen an increase of only 3.3% since October 7, the potential for a broader conflict continues to keep markets on edge.

Market participants are now expected to factor in an additional war-risk premium due to these recent developments. Analysts like McNally and ANZ anticipate that this added risk premium may influence the price of crude oil throughout the week.

Furthermore, the escalation of this conflict raises concerns about supply disruptions that have been a concern since the start of the current geopolitical situation, according to certain Tier 1 investment banks.

Although both Israel and the Palestinian territories are not major oil players, the geographical location of the conflict within a key oil-producing region has raised concerns that the war could extend beyond Gaza. US National Security Advisor Jake Sullivan has acknowledged an "elevated risk" of the conflict spreading to other parts of the Middle East.

Of particular concern is the potential involvement of Iran in the conflict. Iran, a significant oil producer, is expected to align against Israel if it becomes embroiled in the situation. Israel's military has accused Iran of orchestrating attacks by militia groups it supports in various regions and aiding Gaza troops with intelligence. Additionally, Iran is deploying an online messaging campaign to bolster anti-Israel sentiment.

Bank of America has cautioned that retaliation against Tehran could jeopardise vessel passage through the Strait of Hormuz, a crucial channel recognised as the world's most vital oil transit chokepoint. The bank's note suggests that if the strait were to be closed, oil prices could surge beyond $250 per barrel.

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