Due to the escalation of the conflict between Israel and Iranian-backed Hezbollah, the price of oil rose by 10% during the week. Israel attacked Hezbollah, and Iran fired about 200 missiles in response. This led to an immediate increase in the price of oil to $81 per barrel, although the price then fell.
Two and a half years ago, Russia’s invasion of Ukraine caused a significant increase in oil prices, which exceeded $120 per barrel. This was due to Western sanctions against Russia and fears of supply disruptions to the world’s second largest oil exporter. This time around, events could go the other way.
If the conflict between Israel and Iran continues or becomes more acute, it could lead to a further rise in oil prices on concerns about the stability of supplies from the region. In addition, possible sanctions or other economic measures could affect the oil market. However, if the conflict is resolved quickly, prices could stabilise or even decline. These are just some of the possible scenarios, and much depends on further developments in the region.
Is a global oil shock possible due to the conflict in the Middle East?
If the fighting between Israel and Iran intensifies, it could lead to a serious oil shock.
However, some current factors in the oil market make it less vulnerable to such a shock than in 2022. According to the International Energy Agency (IEA), global oil supply has increased.
Thus, in the second quarter of 2024, global oil supply increased by 230 thousand barrels per day to 103.4 million barrels per day. This means that the oil market has more reserves than in 2022, which can help smooth out the impact of the oil shock. Oil demand is growing, but very slowly. The IEA forecasts that global oil demand will grow by less than 1 million barrels per day in 2024 and 2025. This is significantly less than the demand growth in 2022.
There is some stability in the oil market now, which is helping to reduce the impact of the oil shock. For example, China’s oil demand has declined, which also contributes to lower overall demand.
Although an oil shock could affect the market, the presence of oversupply and lower demand makes it less vulnerable than in 2022. However, this could change if the conflict continues or escalates.
Recently, US President Biden hinted that Iran’s oil infrastructure could be in Israel’s crosshairs. This has caused concern in the oil market. But even if Iran’s oil production is disrupted, Iran is not a major oil producer like Russia. Iran exports about 2 million barrels per day, which is about 2% of global supply. By comparison, Russia exports almost 5 million barrels per day.
The global situation is also very different from 2022. When Russia invaded Ukraine, oil was in short supply and demand was surging as global economies emerged from post-COVID lockdowns. The market was ready for excitement. Today, there is an oversupply on the oil market. The Organisation of the Petroleum Exporting Countries (OPEC) and its allies, led by Saudi Arabia, tried to maintain high prices by reducing production. However, this plan failed due to the indiscipline and deception of other members. Now the cartel promises to increase production in December. This means that the oil market is less vulnerable to an oil shock than in 2022, thanks to oversupply and lower demand.
What could force the Saudis to change their strategy in the oil market
Saudi Arabia, which seeks to maintain high oil prices to finance its ambitious domestic spending plans, is forced to change its strategy. The Saudis have lowered their ‘target’ oil price to $100 per barrel in order to maintain their market share. This reflects the difficulties the country is facing in securing financing for its major projects, such as the fantastic Neom city of the future.
OPEC and its allies have spare capacity of over 5 million barrels per day. Saudi Arabia alone has the capacity to increase production by 3 million barrels per day. This makes it a key player in the oil market that can significantly affect prices.
It also means that the Kingdom has a powerful influence on global oil prices and can use its resources to strengthen its position in the market, even at the expense of lower prices.
Recently, OPEC has indeed been facing some challenges due to changes in the global oil market. After all, almost 60% of global oil now comes from non-OPEC countries, compared to 44% in 2019. This means that OPEC’s influence on the global oil market has decreased.
The US has become the largest oil producer in the world thanks to the development of the shale industry. This has changed the geopolitical map of the oil market. At the same time, Brazil, Canada, and Guyana have significantly increased their oil production. This helps reduce dependence on OPEC oil.
Oil market forecast for 2025
According to the International Energy Agency, non-OPEC oil production will increase by 1.5 million barrels per day next year. This highlights the upward trend in non-OPEC oil production. These changes show that the global oil market is becoming more diverse and less dependent on one organisation or group of countries.
The US Energy Information Administration has lowered its forecast for oil demand growth in 2025. This is due to the weakening of economic activity in the US and Europe. After the pandemic, the economies of these regions began to slow down, which affects oil demand. Rising interest rates in the US and Europe are also affecting the economy. High interest rates make loans more expensive, which limits investment and consumption, which in turn affects oil demand.
China, which is one of the largest oil consumers, is currently struggling with a real estate crisis. This leads to a decrease in production activity and demand for oil. In October of this year, the EIA updated its forecast for global oil demand for 2025, in part due to weaker manufacturing activity around the world. This means that oil demand will grow more slowly than previously expected. Oil traders expected a surplus of oil in 2025, which would push prices below $70 per barrel. This is due to an increase in supply and a decrease in demand.
The current stable supply of oil on the market does provide some protection against geopolitical shocks, but this protection is not unshakable. If Israel strikes at Iran’s oil infrastructure, Iran could respond by attacking oil facilities in countries that have economic ties with Israel, such as Bahrain or the United Arab Emirates.
Another possible scenario is that Iran could block the Strait of Hormuz, through which a significant portion of oil from the Persian Gulf passes. This is a strategically important waterway, and blocking it could have a significant impact on global oil prices, pushing them up to the 2022 level. Such actions could lead to serious disruptions in oil supplies, which in turn could cause a significant increase in oil prices on the global market. This underscores the importance of stability in the region and the need for international cooperation to prevent the escalation of conflicts.
Tetyana Morarash
