Intense combat is currently taking place in a region that possesses a significant portion of the world's petroleum reserves. However, despite initial concerns following the 7th of October escalation of conflict in Gaza, energy markets have experienced a decline rather than a spike. The price of Brent crude, the global oil benchmark, is now around $80 per barrel, which is lower than when the fighting initially commenced.
The main question we address is why the prices are not rising. The main reason is that, despite the brutality of the ongoing conflict, there has been minimal disruption to petroleum supplies, and there is no immediate threat to production. Moreover, traders do not anticipate an escalation in risk, which would necessitate precautionary buying. Essentially, the markets are disregarding the possibility of major adverse developments. Traders are unlikely to drive up prices unless they witness actual reductions in the availability of oil.
Moreover, oil prices dropped sharply on Monday, 8th of Jan, as Saudi Arabia’s decision to cut its official selling price for oil exports in February overshadowed heightened tensions in the Middle East. Brent crude, fell 3.9% to $75.70 a barrel after Riyadh lowered its official selling prices. The equivalent US benchmark fell 4.7% to $70.37 a barrel. The Saudi decision to cut the price of oil exported to Asia by $2 a barrel, was taken by investors as a signal that the world’s biggest exporter may be struggling to sell all of its production. The move by Saudi Arabia may also be a sign that the country, which has been struggling to forge consensus and discipline within OPEC+, would be unwilling to unilaterally sacrifice its own market share to support prices.
As the fighting persists, traders have recognized that there are "haves" and "have-nots" when it comes to oil in the Middle East. Gaza produces no oil, and Israel's production is limited. Therefore, for there to be a significant disruption in supply, the impact of the war would need to extend to the vast oil fields of Saudi Arabia, Iraq, or Iran. In the early stages of the conflict, Iran's foreign minister proposed an oil embargo against Israel, evoking memories from 50 years ago. However, times have changed and nothing materialized. Considering the concerns surrounding the role of fossil fuels in climate change and the dependence on oil for revenue, implementing such a ban would risk negative consequences for the countries imposing it. Iran, in particular, would risk alienating China, a crucial customer for the Islamic Republic. It is likely that the conflict will remain contained and not spill over into the major oil-producing nations in the region.
Despite witnessing no effect on prices of oil till now, expansion of the conflict across the region or elongated and critical disruptions to shipping routes, can pose serious threats and result into disruption in oil supply and higher global oil prices. Such scenario doesn’t seem highly probable but it can’t be fully disconnected.
