Oil prices on the brink as Middle East tensions threaten global supply
For interview requests, click here
The oil-rich Middle East is in flames, with almost 50,000 people reportedly killed, including over 40,000 Palestinians. The war is expanding, and Lebanon is now also on fire.
With the situation still evolving, it is impossible to predict the exact trajectory of oil prices in the coming days and weeks.
Crude oil markets have started responding to the geopolitical tensions in the Middle East, although the reaction remains somewhat subdued. While prices have risen, they have not experienced the sharp spikes or dramatic increases often seen in past regional conflicts.
The critical question facing crude markets today is how much oil prices could rise. That’s a tough question to answer. One crucial factor is the upcoming U.S. presidential election, just weeks away. No administration, including the Biden-Harris administration, wants a spike in gas prices right before voters go to the polls. This political dynamic could influence decisions and actions, adding complexity to an already volatile situation in the global oil market.
So far, markets have largely shrugged off regional risks because the ongoing conflict hasn’t disrupted oil supplies. Instead, traders have been more focused on concerns about softening demand.
But this has begun to change. Since the beginning of October, oil prices have surged as geopolitical tensions escalated, with Iran launching missile strikes on Israel in retaliation for Israeli attacks in Lebanon. By the end of last week, benchmark Brent crude had risen more than eight percent, trading around US$78 a barrel.
If Israel retaliates against Iran, the market’s reaction would depend on two key factors: the intensity of the response and the target(s) of any potential Israeli attack. If Israel’s strike is significant, it could lead to fears of major supply disruptions, driving oil prices even higher. Another critical factor is whether Iran would counter-retaliate, as it has warned, and what the targets of such an attack might be.
Another critical factor would be U.S. influence on Israel, particularly with the upcoming U.S. presidential elections. Will a belligerent Netanyahu tone down his response under U.S. pressure, especially with the potential political fallout in the U.S.? If Israel’s actions lead to a significant spike in gas prices, it could damage the Biden-Harris campaign and potentially benefit Donald Trump, something Netanyahu may quietly prefer. A spike in prices, many believe, would sway voters toward Trump, further complicating an already tense geopolitical situation.
Pundits are divided on how tit-for-tat attacks between Israel and Iran might impact oil markets. While some expect prices to rise, many believe any spike would be limited, with the chances of crude hitting three digits considered low. ClearView Energy Partners estimates that if Israel targets Iranian energy facilities, world oil prices could increase from the current level of around US$74 to approximately US$86 per barrel.
One major risk is an attack on Iran’s main export facility at Kharg Island, which handles 90 percent of the country’s oil exports. Such a strike could significantly affect global energy prices. In August, Iran’s oil exports reached a “robust” 1.8 million barrels per day, according to the International Energy Agency. A disruption in oil from Kharg Island would likely lead to increased oil prices and heightened market volatility due to tightening supply and existing geopolitical tensions.
If Iran retaliates by blocking the Strait of Hormuz, the situation will escalate significantly. The Strait is a critical chokepoint for global oil shipments, and any disruption there could lead to a sharp spike in oil prices. According to ClearView, such an event could push oil prices above US$100 per barrel, as the blockage would severely restrict the flow of oil from the Middle East to global markets. This kind of disruption would exacerbate the already tense situation and lead to further market instability.
According to Citigroup, “In such a scenario, global oil markets would be in unchartered waters, with oil prices likely experiencing a sharp and significant spike well past previous record highs.” Citigroup, however, stressed that such an event is unlikely and that the price spike would (at best) be temporary as the market adapts.
Rob Thummel, who manages the Tortoise Energy Infrastructure Total Return Fund, believes that a prolonged disruption, such as the closure of the Strait of Hormuz that could temporarily reduce global oil supply by 20 percent, would cause oil prices to “temporarily spike” potentially above US$100 per barrel. However, he cautioned that the U.S. is “keenly aware of the significance of the Strait of Hormuz and is likely to use all means to keep the strait open,” thereby limiting the duration of any potential supply disruption.
Goldman Sachs has projected that international crude oil prices could jump by US$20 per barrel if Iran’s oil supply drops due to an escalation in the Middle East conflict. “If you were to see a sustained one million barrels per day drop in Iranian production, then you would see a peak boost to oil prices next year of around US$20 per barrel,” Daan Struyven, co-head of global commodities research at Goldman Sachs, told CNBC’s “Squawk Box Asia” on Friday.
However, Struyven’s projection assumes that OPEC+ would not respond to a disruption in Iranian supply by increasing production. If major producers within OPEC+ – such as Saudi Arabia and the UAE, who have spare production capacity – decide to boost output, they could offset some of the losses from Iran. In that case, oil prices would rise more modestly, and the increase could be closer to US$10 per barrel rather than US$20s.
The world is watching, and the stakes couldn’t be higher.
Toronto-based Rashid Husain Syed is a highly-regarded analyst specializing in energy and politics, with a particular emphasis on the Middle East. Besides his contributions to local and international newspapers, Rashid frequently lends his expertise as a speaker at global conferences. Organizations such as the Department of Energy in Washington and the International Energy Agency in Paris have sought his insights on global energy matters.
Explore more on Energy security, Canadian economy, World economy
The opinions expressed by our columnists and contributors are theirs alone and do not inherently or expressly reflect the views of our publication.
Troy Media
Troy Media is an editorial content provider to media outlets and its own hosted community news outlets across Canada.
