Global oil market expected to absorb Middle East conflict impact. Experts predict price spike will fade
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The situation in the Middle East has taken a troubling turn. It’s a rapidly evolving scenario, making it nearly impossible to predict the next moves of the warring parties or their impact on the oil markets.
The Middle East plays a crucial role in global oil stability. Any rise in tensions or disruptions to the flow of crude oil could significantly shift the global market.
The possibility of Iran becoming directly involved in the ongoing war is growing. The conflict between Israel and its neighbours has already claimed nearly 50,000 lives, a colossal human tragedy. This crisis is now starting to cast its shadow over the oil and energy markets.
Recent developments in Lebanon have shifted attention away from Gaza, where human suffering continues. The escalating conflict between Iran-backed Hezbollah and Israel is raising concerns about potential disruptions to oil supplies and key shipping routes.
According to Julianne Geiger from Oilprice.com, the growing uncertainty and fears of attacks on major ports like Haifa and Eilat have heightened risk assessments for oil transport. As a result, insurance premiums are expected to rise, reflecting the threat to Israeli and neighbouring maritime infrastructure. Investors are driving up oil prices in anticipation of supply disruptions and increased demand for secure reserves. If the conflict escalates further, price spikes are likely.
The conflict also threatens regional shipping lanes, with Yemen’s Houthis escalating attacks on U.S. vessels and Israeli targets, further destabilizing the region.
According to analysts quoted by ABC News, an escalation of the war in the Middle East could lead to a sharp rise in oil prices and rekindle U.S. inflation, raising costs for essentials like gasoline and plastics. “The biggest concern (over the widening war theatre) would be a sharp escalation in crude oil prices,” Jason Miller, a professor of supply-chain management at Michigan State University, told ABC News.
But would such a price spike last? The answer is no.
There are several factors contributing to the gloomy outlook for the oil market. Global demand remains sluggish, with the growth in Chinese demand – a key driver of oil demand for years – now absent. The hope for a significant rebound in Chinese crude demand in the short term is minimal.
Meanwhile, more oil is entering global markets. According to the U.S. Energy Information Administration, the U.S. set a record for crude production in 2023, averaging 12.9 million barrels per day. This surge in U.S. output is expected to help offset any potential supply disruptions.
In addition, increased oil supplies from Africa and some OPEC members are adding to the total volume of crude and setting the stage for a battle over market share.
In early September, OPEC+ decided to delay a planned production increase for October and November after crude prices dropped to a nine-month low. This cautious approach aimed to stabilize the market in response to falling prices. The group also indicated it might further delay or even reverse production hikes if necessary to prevent further price drops.
However, more recent reports suggest that Saudi Arabia, OPEC’s leader, is now willing to shift its strategy. The Financial Times reports that the kingdom is prepared to abandon its unofficial US$100 per barrel oil price target and increase output to regain market share, even if that leads to lower prices in the short term.
These contradictory positions reflect a change in priorities. Initially, the focus was on stabilizing prices by limiting supply. Now, Saudi Arabia is prioritizing long-term market share over maintaining high prices. As a result, Saudi Arabia and its OPEC allies are committed to raising production as planned on December 1, even if it results in a prolonged period of lower crude prices.
In other words, any price spikes caused by tensions in the Middle East are likely to be short-lived.
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 both 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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