Escalation of Violence in the Middle East: What Impact on Oil Markets?

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The escalation of tensions in the Middle East, particularly between Tehran and Tel Aviv, has led to an almost 9% increase in oil prices. How have oil prices evolved since the beginning of the war in Gaza? What has been the impact of this conflict and its recent regionalization on the black gold market?

Since the start of the war in Gaza one year ago, the price of Brent oil has fluctuated within a wide range, from just under $70 per barrel (about a month ago) to over $90 per barrel (in October 2023 and Spring 2024). This fluctuation of around $25 is significant but much smaller compared to the fluctuations observed at the beginning of the war in Ukraine.

Prices immediately rose after October 7, 2023, before sharply falling until the end of November and early December 2023. They then rebounded sharply until Spring 2024, before falling again to a low below $70 per barrel around September 10. The recent situation in Lebanon, the confrontation between Israel and Hezbollah, Iranian strikes against Israel on October 1, 2024, and the expectation of an Israeli retaliation have pushed oil prices back above $80 per barrel. Before this, the price increases were driven by fears that the Gaza conflict could spread to other parts of the Middle East, which unfortunately occurred, as well as attacks by the Houthis in Yemen against merchant vessels in the Red Sea. The price drops were explained by the hope, at the start of the conflict, that U.S. military involvement for deterrence and diplomatic efforts to find a political solution would yield positive results, and more recently, concerns from oil markets about the global economy, particularly the Chinese economy. It is important to note that China is the second-largest consumer and the largest importer of oil.

On October 9, 2024, by the end of the day, Brent had dropped to around $76.60 per barrel. Now, everyone is waiting to see when and how Israel will strike Iran. One of the key questions for traders is: will there be oil and energy targets in the Israeli retaliation, and if so, what will they be? Another crucial point is how extensive this retaliation will be. Finally, the third key topic is whether Iran will retaliate against Israel’s response to the Iranian strikes of October 1.

In light of the upcoming U.S. presidential election, what is Washington’s response to this price increase and the fear of a potential Israeli retaliation? What analysis can be made of Washington’s ability to influence the oil sector compared to that of OPEC+ members?

The Biden administration has “advised” Israeli leaders not to retaliate too forcefully in order to avoid further escalation and has made it clear that it is not in favor of striking nuclear or oil targets. Regarding oil, the U.S. motivations are as follows: such strikes would drive up oil prices, and thus fuel prices, which would not be beneficial for Kamala Harris in her duel with Donald Trump; the rise in crude prices would be good news for Russia, which needs a lot of money due to the war in Ukraine; Iran could retaliate, as some Iranian officials have indicated that Israeli strikes on oil and/or nuclear sites in Iran would be red lines; and there are concerns that oil assets in other Middle Eastern countries could be negatively affected by this escalation of tensions. Of course, this view of the Biden administration would not be the same as that of a potential Trump administration.

The United States is currently the world’s top oil producer, ahead of Russia and Saudi Arabia, in that order. The country has never produced as much oil in its entire history, and even more importantly, no other country has ever produced at such a level in the entire history of global oil production. Their crude oil production exceeds 13 million barrels per day (Mb/d) out of a global production that will be around 103 Mb/d in 2024. Therefore, the weight of this country is very significant in oil terms. That said, OPEC, which includes 12 countries, produces at least 27 Mb/d, and OPEC+ (22 countries) produces 41-42 Mb/d. Not to mention that OPEC+’s production capacity is more than 6 Mb/d higher than its current output. Therefore, one cannot ignore this coalition, even when one is the United States.

OPEC+ member countries (notably Saudi Arabia and Venezuela), the United States, Russia, China… What are the prospects and main challenges for these players in the oil and gas sector? Is a gradual reshaping of supply and international flows underway or not?

There has already been a recent reshaping of international oil flows, but it was linked to the war in Ukraine and not the one in Gaza. The actual oil impacts of this second conflict are, to date, much less significant than those following February 24, 2022. In 2022, the European Union decided to almost completely stop importing crude oil and refined products from Russia and turned more towards North America, the Middle East, and Africa to meet its oil needs. On the other hand, Russia has increasingly turned to Asia for its oil exports, with China and India leading the way. The Gaza war has so far had much more limited oil impacts, but we must wait and see what happens between Israel and Iran, the latter controlling enormous oil reserves and being the seventh or eighth largest oil producer in the world.

Venezuela controls the largest proven oil reserves in the world, ahead of Saudi Arabia and Iran. However, its production is very low compared to this huge potential: around 900,000 barrels per day, which is ten times less than Saudi Arabia… This is due to the country’s economic collapse in recent years. Therefore, it is not particularly well-placed to benefit from the situation. The United States, OPEC+, and, within this alliance, countries like Saudi Arabia and the UAE are in a much more favorable position. However, OPEC+ is facing serious challenges. Without the Gaza war and its extension across the Middle East, crude oil prices would be much lower than they are today, as global oil demand growth is slowing and supply is abundant. There is a geopolitical premium in the current oil prices, and this would disappear if political solutions were found tomorrow to the tensions and conflicts in the Middle East. But unfortunately, this is not a very credible short-term scenario.