The current conflict, involving Iran, Israel, Hezbollah, and the United States, resembles the Second Arab-Israel war of 1956-57, when Egyptian President Gamal Abdel Nasser seized the Suez Canal and closed it for six months, taking 10 per cent of the world's oil off the market. But oil prices remained stable, because production outside the region stymied a spike.
In fact, Saudi Arabia is worried that crude oil prices could plummet to $50 a bbl if OPEC-plus does not adhere to output cuts, says the Wall Street Journal, citing delegates from oil cartel OPEC.
“Crude oil prices rose today (Wednesday) on fears that the war in the Middle East is going to get bigger and more intense after Iran fired missiles at Israel, with Brent crude close to $75 a bbl,’’ says Tilak Doshi, an international energy expert. “But the downside/bearish signals still hold strongly over global oil markets.”
China’s manufacturing sector continued contracting for the fifth straight month. Questions over the effectiveness of its latest stimulus plans, and poor data on manufacturing activity for Japan and Germany show signs of weak oil demand, says Doshi.
Besides, the propensity of traders to drive up volatility fundamentals do not support high oil prices. The International Energy Agency forecasts 900,000 bpd of additional oil demand this year and 950,000 bpd in 2025, from 2.1 million bpd in 2023. Incremental output is more than sufficient to meet demand growth, with annual output gains strengthening to 2.1 million bpd in 2025. Non-OPEC+ increases contribute to 1.5 million bpd this year and next, the agency has said.
However, things can go horribly wrong only if the war stretches to the Strait of Hormuz, “the world’s most important chokepoint”, according to the US Energy Information Administration.
“Threats to transport via the Strait of Hormuz represent a much larger potential shock to global oil supplies than Russia’s invasion of Ukraine,’’ says a note by Benjamin Shoesmith, senior economist, KPMG Economics. “Any disruptions to that flow would have a major impact on prices.”
Iran has previously threatened to close the Hormuz Strait, 21 miles across at its slimmest point, and has seized tankers in that area. Shoesmith sees prices skyrocketing to $140 a bbl if the passageway is attacked before settling back to $80-$90 a bbl.
The only obstruction to oil flows from the West Asia conflict has been rerouting of cargoes after the Houthis started attacking tankers in the Red Sea since last November, prompting more expensive voyages around Africa. However, what could precipitate matters in the Strait of Hormuz is an Israeli attack on Iranian oil infrastructure in retaliation to this week’s missile attack, which would still need Washington’s blessings, says an Indian refining official.
Iran exports an estimated 1.5 million bpd, or 1.5 per cent of global demand. So, quantitatively, this is not a major issue in itself, but a widening of the war will be a key upside risk for oil prices, says Doshi.
Oil prices during wars
1860s: US Civil War drives up oil prices six fold
World War I (1914-18): Prices double
Russia–Ukraine war erupts, US energy sanctions (2022 onwards): Brent crude oil futures rise by 50% to the highest in a decade
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