What is Causing Oil Prices to Decrease Despite Conflict in the Middle East?

Intense fighting is ongoing in a region that holds a significant portion of the world’s petroleum resources. Despite this, energy markets have seen a decline in recent days. The price of Brent crude, the international oil benchmark, has fallen to about $80 per barrel, lower than when the fighting began.

Analysts attribute the lack of price increase to the limited disruption to petroleum supplies caused by the conflict. As a result, traders have concluded that there is no immediate threat to the supply.

Richard Bronze, head of geopolitics at Energy Aspects in London, stated, “While traders realize there is an increased risk, that hasn’t led to a lot of precautionary buying.” According to Raad Alkadiri, managing director for energy and climate at Eurasia Group, the markets are essentially disregarding the possibility of anything going wrong in the Middle East, unless they see actual barrels removed from the market.

Despite the ongoing conflict, the market’s attention has returned to concerns about future demand for petroleum, primarily driven by economic worries about major consumers such as China. Additionally, forecasts indicate that 2024 could be a challenging year in the oil markets, with U.S. gasoline consumption expected to decline due to factors such as more efficient vehicle engines, increased electric car usage, and reduced commuting as a result of hybrid work schedules.

This bearish sentiment, which was affecting prices even before the Israel-Hamas conflict, seems to be influencing the market again, despite the risks of a wider war.

Robust oil production in the United States has also provided assurance to the markets, with supplies from the country’s largest producer reaching a monthly record of just over 13 million barrels a day. According to Jim Burkhard, vice president and head of research for oil markets, energy, and mobility at S&P Global Commodity Insights, “Strong oil market fundamentals are prevailing over any fears at the moment.”

Traders have realized that when it comes to oil, there are disparities in the Middle East. Gaza produces no oil, and Israel’s production is minimal. Therefore, a significant disruption in supply would require the war’s effects to extend to the oil-rich regions of Saudi Arabia, Iraq, or Iran.

Early in the conflict, Iran’s foreign minister called for an oil embargo against Israel, reminiscent of the oil embargo 50 years ago. However, such a move could backfire in the current context due to concerns about the impact of fossil fuels on climate change and the dependence on oil for revenues. According to a recent note from Eurasia Group, “The risk to supply is very unlikely to come from an independent decision to curtail oil sales by Iran or OPEC. Any such move would inflict as much — if not more — damage on producers as on consumers.”

While a significant disruption is unlikely, it is not inconceivable. Four years ago, a missile attack on a key Saudi facility, for which American officials blamed Iran, temporarily halted about half of the kingdom’s oil production.

In a worst-case scenario, Iran, the primary supporter of Hamas, could attempt to block the Strait of Hormuz, a critical route for oil transportation. Helima Croft, head of commodities at RBC Capital Markets, suggested that traders’ apparent complacency about the war’s impact may partially stem from past experience, where market prices surged but quickly fell.

According to Croft, who is a former analyst at the Central Intelligence Agency, the market’s lack of attention to these issues could lead to unexpected consequences. She warned, “We could still be caught by a nasty surprise in the Middle East.”

Efforts are being made by the Biden administration to prevent the escalation of the war. Meanwhile, regional oil powers, including Iran, would prefer to maintain the flow of tanker traffic through the Persian Gulf, recognizing that halts would affect their export earnings and could potentially alienate their key customers.

Richard Bronze of Energy Aspects emphasized, “It’s likely the conflict remains contained and doesn’t spill over into the big oil producers in the region or the key shipping lanes. The risks are more from miscalculation and misjudgment.”

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