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Home » Why are oil prices falling while war rages in the Middle East?
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Why are oil prices falling while war rages in the Middle East?

Dakota Johnson
Last updated: 2023/11/09 at 1:10 PM
Dakota Johnson
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Why are oil prices falling while war rages in the Middle East?
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Contents
Decreasing demand in focusHaves and Have-notsThe remaining risks

Fierce fighting is underway in a region that holds much of the world’s oil resources. But after a few days of fear following the bloody Oct. 7 raids by Hamas militants in Israel, energy markets have slumped. Brent crude, the international oil benchmark, now sells for about $80 a barrel, cheaper than when the fighting began.

Why aren’t prices higher? A key reason, analysts say, is that the fighting, while intense, has caused little disruption to oil supplies, leading traders to conclude there is no imminent threat.

“While traders recognize there is an increased risk, it has not led to much precautionary buying,” said Richard Bronze, head of geopolitics at Energy Aspects, a London-based market research firm.

On the Middle East, markets are “effectively dismissing the possibility that anything could go wrong,” said Raad Alkadiri, director of energy and climate at political risk firm Eurasia Group.

Mr Alkadiri said traders are unlikely to raise prices unless they see “real barrels” being removed from the market.

Decreasing demand in focus

The market appears to have stalled on the war and returned to an atmosphere of pessimism about future oil demand, dominated by economic concerns about China, the largest oil importer, and other major consumers. Saudi Arabia and other producers are trying to support prices by reducing their oil production.

Forecasters warn that 2024 could be a tough year for oil markets. The U.S. Energy Information Administration predicted this week that gasoline consumption in the United States would decline next year due to fewer commutes as more people adopt hybrid schedules, more efficient vehicle engines and a growing number of electric cars.

The bearish sentiment caused prices to fall sharply before the Israel-Hamas conflict and it appears to be weighing on the market again despite the risks of a wider war.

Haves and Have-nots

As the fighting continues, traders have concluded that there are both haves and have-nots in the Middle East when it comes to oil. Gaza produces no oil and Israel produces little. For there to be a material disruption of supplies, the consequences of the war would have to spread to the gigantic oil fields of Saudi Arabia, Iraq or Iran.

Early in the conflict, Iran’s foreign minister called for an oil embargo against Israel, bringing back memories of the oil embargo of fifty years ago. But times have changed: given concerns about the role fossil fuels play in climate change and their dependence on oil for revenue, such a move could backfire on countries that have imposed such bans. Iran would risk alienating China, the Islamic Republic’s main customer.

“It is highly unlikely that the risk to supply will arise from an independent decision to curtail oil sales by Iran or OPEC,” Eurasia Group said in a recent note. “Any such move would harm producers as much – if not more – as it would harm consumers.”

The remaining risks

A disruption is not unthinkable. Four years ago, a missile attack on a key Saudi facility, which U.S. officials blamed on Iran, temporarily knocked out about half of the kingdom’s oil production.

In an extreme case, Iran, Hamas’s main backer, could try to block the Strait of Hormuz, through which vast amounts of oil flow to the rest of the world. “I still think there is significant risk of this spreading,” said Helima Croft, head of commodities at RBC Capital Markets, an investment bank.

Ms. Croft attributes the apparent complacency about the war’s impact partly to the fact that traders lost money when prices soared above $120 a barrel after Russia’s invasion of Ukraine, but then fell rapidly.

“The market just doesn’t pay attention to these kinds of issues anymore,” she says.

Ms. Croft, a former analyst at the Central Intelligence Agency, said the apparent success of the early days of the 2003 invasion of Iraq by United States forces ultimately led to a conflict that dragged on for years. “We could still be in for a nasty surprise in the Middle East,” she said.

The Biden administration is actively involved in preventing an expansion of the war. Regional oil powers, including Iran, are also said to prefer to keep tanker traffic flowing through the Persian Gulf. Any halt would shrink their own export earnings, while price spikes risk harming and alienating their most valued customers.

“The conflict is likely to remain contained and not spill over to the region’s major oil producers or major shipping lanes,” Energy Aspects’ Mr Bronze said. “The risks are more the result of miscalculations and misjudgments,” he added.

Dakota Johnson 9 November 2023 9 November 2023
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By Dakota Johnson
Dakota Johnson is a highly accomplished business expert known for her profound understanding of the corporate world and the intricacies of entrepreneurship. She embarked on her journey with New York Business Times in 2017 as a business correspondent and has since carved out a distinguished career in the field.
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