Oil is no longer immune to the powder keg of the Middle East. After several weeks of general anesthesia, with the price of crude oil at almost three-year lows, Iran’s emergence into the conflict has revived a latent fear: that the regional clash will end up leading to Israeli retaliation on Iranian wells or even an attack. of Tehran on Saudi fields or refineries, as already happened in September 2019. The most extreme scenario – and feared, due to the consequences it would entail – would be the closure of the Strait of Hormuz, an absolutely crucial route through which a fifth of the world crude oil. The closure of this route between Iran and Oman, just 34 kilometers at its tightest point, would be a major blow to the balance of prices.
Those who follow the day-to-day life of the energy markets had been absorbed for weeks, wondering how it was possible that the price did not react, even minimally, to the escalation in the Middle East, cradle of one in every three barrels extracted every day on the planet. . “What we were seeing was something truly strange in a historical sense,” reflects Jorge León, vice president and head of oil analysis at the consulting firm Rystad Energy after many years as a senior OPEC analyst.
“Some were rubbing their eyes: a year ago, with the conflict between Israel and Lebanon alone, the price of oil would have gone triple digits,” wrote Norbert Rücker, head of economic studies at the Swiss investment bank Julius Baer, a few hours before. that Iran stirred up the regional hornet’s nest with the launch of two hundred missiles on Israeli soil and raised the price of Brent by four dollars in just two days.
The markets were confident, finally, in two factors: that the shock would not be greater and that the enormous idle capacity of the Organization of Petroleum Exporting Countries (OPEC), at maximum levels in many years, would compensate for any possible cut in production. But this fragile balance has been blown up with the Iranian attack on Israel, a move with consequences yet to be deciphered. Thus, goodbye was said to the so-called geopolitical fatigue: the false sense of security after not a single barrel had left the market in the almost 12 months since the Hamas attacks in Israel.
“No one really knows how far this situation can go. What is Israel’s response going to be now? And Iran’s possible response? Will other actors get involved? [regionales]?“, Trafigura chief economist Saad Rahim asks rhetorically in statements to Bloomberg. His voice is not exactly light: Trafigura is one of the largest traders global raw materials.
There is, however, one thing clear: “The oil market came from a stage of extreme complacency regarding geopolitical risk,” summarizes Bob McNally, former energy advisor to the US Administration during George W. Bush. “This risk premium will grow whether the market perceives that the escalation directly impacts infrastructure or energy flows, or if Israel attacks critical infrastructure for the regime.” [iraní]”.
Despite the twist of the script in recent days, it is worth putting the escalation in perspective. Even after two consecutive days of growth, which have taken Brent to around $75 per barrel, levels seen at the beginning of September, the European benchmark is still close – very close – to its annual lows. And it is still not, at least for now, a worrying element in the midst of lower interest rates on both sides of the Atlantic. Much more would have to rise to become, once again, an inflationary factor.
The second hot topic has to do with the important change in the structure of the world market in recent years. Saudi Arabia, the United Arab Emirates and even Kuwait have considerable idle capacity that they could put on the market if necessary: about eight million barrels per day, four of them in the very short term (in less than 60 days). A significant cushion, higher, for example, than what Iran—the world’s seventh largest crude oil producer—puts on the market every day: 3.2 million barrels, 4% of the total.
“That should calm the market,” says León by phone. China, a market in which consumption is showing signs of weakness and in which the electrification of transport is clearly putting downward pressure on medium and long-term forecasts, has already left its production peak behind. With a theoretical surplus starting next year and that will reach its peak in 2030, according to calculations by the International Energy Agency (IEA).
Radical shift in market structure
The global crude oil bazaar has little to do with that of a decade ago. Although still significant, the weight of the Persian Gulf countries is notably lower, which reduces the proportion of oil subject to geopolitical anxiety. The other side of this coin is growing production in Western or Western orbit countries: Canada, Brazil, Guyana and, above all, the United States, which has managed to become the first crude oil extractor on the planet through hydraulic fracturing. (fracking)a technique that has revolutionized the sector. The result of both forces is a greater volume of crude oil sheltered from the geopolitical upheaval.
There is more. The second day of increases in the price of crude oil has coincided with the telematic meeting between the members of the OPEC cartel, with the prospect still alive that they will put an end to the unilateral supply cuts with which they have dealt as of December. to support prices in recent years. A step that, if finally taken, would clearly put downward pressure on the price of crude oil.
“If Israel’s response [a Irán] is not too aggressive, the markets could consider that both countries, for the second time this year, prefer to de-escalate after a brief hostile exchange,” confides Francesco Pesole, of the Dutch bank ING. “The key is Hormuz,” León says in reference to a potential closure of the strait, the last weapon in the Iranian arsenal to economically harm the West and whose activation would elevate the conflict to another dimension. “The consequences on global supply would be enormous, similar to that of the Russian invasion of Ukraine in 2022.” What is said soon.