One would expect the first open Israel-Iran conflict in 20 years, after the Iranian attack of 14her April, would affect oil markets. However, prices haven’t taken off, but that doesn’t mean there isn’t a chance we’ll wake up one morning and see $10 a barrel higher.
It appears that the fears of those expecting a war in the Middle East involving one of the world’s largest oil producers were overblown, as London and New York saw crude prices fall on Monday, April 16.
The Iranian attacks did not target any Israeli energy infrastructure, and while Tehran received help from allied Houthi fighters in Yemen, these strikes were aimed at Israel itself, not at the Red Sea shipping that has been the Houthis’ target of choice since October.
As the American magazine Foreign Policy explains, the market was not shaken because nothing that happened over the weekend was worse for energy markets than what happened after October 7, 2023.
Iran and its proxies continue to rail against Israel, which continues to level and kill civilians in the Gaza Strip. The Houthis continue to harass shipping in the Red Sea and chase away many Western oil companies, but the militants have yet to fire on any tankers.
Iran’s periodic threats to close the even more strategic choke point in the Strait of Hormuz have been as hollow as all its other threats to do so in recent decades.
Besides, as reported by the American publication, the prices of crude oil from the historic low of 70 dollars per barrel have shot up to around 90 dollars as early as the beginning of December.
“There is reduced but not eliminated geopolitical risk,” said Richard Bronze, head of geopolitics at British consultancy Energy Aspects. “Prices falling a bit is reasonable, but don’t expect them to go back to where they were at the beginning of the year just because this particular confrontation didn’t lead to a ‘burst’.”
In fact, oil markets have learned to cope with international crises, which was unthinkable in the past.
Thanks to the self-discipline of OPEC and its partners in curbing production, there is plenty of spare oil production capacity on the world market, that is, an emergency reserve, which, while difficult to activate, can and does keep oil markets a little looser.
But the worst could happen as there are many factors that can shock the oil markets.
“I don’t think we can see Iran and Israel in isolation. Sanctions on Venezuela are set to expire this week. Ukraine continues to target Russian refineries. Congress is considering sanctions on Iran’s exports to China,” said Kevin Book, managing director of ClearView Energy Partners, a Washington-based energy consultancy.
“The oil market is like a tightly coiled French poodle, running at 97% of its capacity when it’s happy, so it only takes a pinch on its leash to make it move.”
First, key oil transit points are targeted. The Houthis continue to harass shipping in the Red Sea and Bab el-Madeb Straits, through which 12% of the world’s seaborne crude supplies pass. And they still put against ships
Iran is still capable of causing problems in the Strait of Hormuz, an even more vital waterway on the other side of Saudi Arabia through which most of Saudi Arabia’s and Kuwaiti crude must pass and almost all of Iran oil.
Second, an eventual Israeli attack on Iran’s oil production facilities seems less likely, but not completely ruled out. Any subsequent attack on Iran’s oil industry could spell trouble for a market that is barely getting by without much help from OPEC or its members.
But aside from military factors, US sanctions on Iran could also send prices soaring. The US Congress is considering additional potential sanctions against Iran, including a bill that would target Chinese banks that help Iran trade oil. With China importing about 1/3 of Iranian oil such a US move could raise oil prices by nearly 10%, according to Kevin Book.
The Biden administration does not want to see higher oil prices in an election year. He has made that clear in Ukraine, repeatedly warning Kiev not to attack critical Russian oil assets, lest US pump prices rise by a quarter of a gallon. But congressional panic, especially when it comes to striking Iran, may not be so easy to contain.
In addition, the European parties to the Joint Comprehensive Plan of Action, the Iran nuclear deal to which the US is no longer a party, could ask the UN to lift sanctions without a veto. Such a move would put pressure on Iranian oil exports, which would make an already almost tight oil market actually tighter.
“When there’s an expected period of tightness, the market adjusts, but when there’s a gradual tightening in the background and something happens, you can wake up and find the market $10 higher,” Richard Bronze said.
