Fundamentals take over as geopolitical tensions fade as the driving force behind oil prices
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Geopolitical tensions have long stirred volatility in oil markets, but their lasting impact on prices seems to be diminishing.
While recent escalations between Iran and Israel have intensified regional tensions, they’ve had only a limited, short-lived effect on oil prices – a marked change from the sustained rallies of past years. Increasingly, the oil market appears to be driven more by core demand and supply fundamentals rather than ongoing global events.
This weekend saw a sharp intensification of the Middle East conflict. Following Israeli airstrikes, Iran’s Supreme Leader Ayatollah Ali Khamenei issued a warning of “crushing” retaliation, and the U.S. responded by deploying additional warships and B52 bombers in support of Israel.
Reports suggest that Iran may retaliate imminently, possibly co-ordinating strikes with proxy allies in Iraq and Yemen, timed to coincide with the U.S. presidential election – a development that would have shaken oil markets much more dramatically in previous years.
Signs of escalation are already apparent. Hezbollah, another Iranian proxy, launched over 60 missiles at Israeli positions in the Galilee and Golan Heights, targeting key IDF bases in a co-ordinated show of force. The Israeli Defense Forces (IDF) responded with activated air defences as missile attacks continued, underscoring the volatile and fast-evolving security situation, as reported by MSN. Both sides are bracing for additional confrontations, and concerns about further escalation are growing.
Despite these heightened tensions, oil markets responded briefly and modestly. Brent crude rose 1.3 per cent to US$73.73 per barrel, while U.S. West Texas Intermediate (WTI) climbed 1.4 per cent to US$70.22 – reversing the previous day’s bearish outlook driven by concerns over demand in China and potential supply increases. Analysts, such as Saxo Bank’s Head of Commodity Strategy Ole Hansen, noted that “geopolitical-related rallies have increasingly become a selling opportunity” as the risk of actual supply disruptions remains limited.
Earlier, oil markets had stabilized when Israel’s October 26 strikes on Iran left oil and nuclear facilities untouched, but by Friday, fear crept back as Axios reported Iran’s plans for a retaliatory strike. This “fear premium” briefly raised prices again, fueled further by reports of escalating conflict across the region.
Recent projections underscore the oil market’s shifting dynamics. A Reuters poll anticipates Brent crude will average US$80.55 per barrel in 2024, slightly down from earlier estimates, with U.S. crude also expected to see minor declines. Geopolitical shocks may still trigger short-term price spikes, but the broader trend points toward stability, with factors like demand in China and production adjustments by key suppliers exerting a more consistent influence on prices.
With the U.S. election looming, oil markets will continue to track developments in the Middle East. Yet, the restrained market response suggests that geopolitical fears alone may no longer drive sustained price hikes. The focus has increasingly shifted to core fundamentals, marking a shift in the oil market’s sensitivity to geopolitical events.
Toronto-based Rashid Husain Syed is a highly-regarded analyst specializing in energy and politics, with a particular emphasis on the Middle East. Besides his contributions to local and international newspapers, Rashid frequently lends his expertise as a speaker at global conferences. Organizations such as the Department of Energy in Washington and the International Energy Agency in Paris have sought his insights on global energy matters.
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