The intensifying conflict in the Middle East and recent missile exchanges between Israel and Iran have led to a temporary surge in oil prices, which rose by approximately 15% or $10 last week, reaching $78 per barrel. However, despite the escalating geopolitical situation, international prices seem stable, as the global crude supply remains sufficient, serving to keep price increases in check.
Lessons from Ukraine, Different Context
Unlike the price surge above $100 following the Russian invasion of Ukraine in 2022, the current global market is in a different position. At that time, tight supply, post-pandemic recovery, and the threat of a Russian oil embargo sparked a significant energy crisis.
In contrast, current demand is weak due to a slowing global economy, worsened by increased tariffs and the trade tensions initiated by Donald Trump. Meanwhile, oil production is rising, driven by the US, non-OPEC nations, and OPEC members that had previously restricted output.
Current Market Overview
A recent report from the International Energy Agency indicates that supply is increasing by 1.8 million barrels per day, more than compensating for an estimated 720,000 barrels of demand growth. This surplus is contributing to stable prices.
So far, the ongoing hostilities have not impacted any critical oil infrastructure in Iran or its neighbors. In fact, Iran’s exports to China have surged by about 40%, reaching 2.4 million barrels a day.
Standoff in the Strait of Hormuz
Despite ongoing threats from Tehran, Iran has not closed the Strait of Hormuz, the vital maritime route through which approximately 20% of global oil production flows. Such a closure would severely impede exports from nations like Saudi Arabia, the UAE, and Iran. Analysts, including those from Citi, consider this scenario unlikely and expect any disruptions to be short-lived, with a maximum price of $90 if a temporary blockage occurred.
Market Fundamentals and Psychology
If attacks occur on major oil installations, the potential for further price hikes may arise. Even so, the excess supply should cushion any resulting pressures.
Currently, the oil market displays resilience and stability. However, a broad conflict in the Middle East could significantly disrupt supply chains and lead to long-term price increases.
Ask Me Anything
Explore related questions
