How does the current Middle East crisis shape the crude oil market?
CRUDE OIL
With approximately one-third of the world’s oil supply, the Middle East has long been a geopolitical hotspot. Lower costs of extraction compared to other regions, proximity to major markets, and enormous oil supplies just underline the importance of this region. Throughout history, conflicts and political instabilities in the area created significant oscillations in crude oil price pushing it even above $150 per barrel. Once again, the current geopolitical crisis and a high risk of major military conflict threaten to create substantial price spikes.
Geopolitical importance in numbers
In terms of supply, the Middle East region accounts for about one-third of total world supplies. The Strait of Hormuz, located between Oman and Iran, is the world’s most important oil transit checkpoint. It handles a large volume of oil flow that represents 21% of global oil consumption. On the opposite side of the Arabian Peninsula, there is another crucial sea route checkpoint, the Bab El-Mandeb Strait. The strait connects the Red Sea to the Gulf of Aden and the Arabian Sea facilitating 12% of seaborne oil trade and 8% of LNG trade.
The Recent Escalation
Over the past six months, tension in the Middle East has been growing, with both Iran and Israel involved in proxy conflicts in several locations. After last week’s Iranian attack upon Israel, recent reports indicate that Israel is preparing a retaliation, which could happen anytime soon. This would be a significant increase in conflict, going beyond the scope of what we have seen so far. Iran has also indicated that it may close the Strait of Hormuz, blocking shipping traffic and adding to regional tensions.
Oil Prices Reaction
As news of Israel’s readiness spread, oil prices swiftly rose. The prospect of direct conflict between Israel and Iran raises concerns about oil supply disruptions. If the situation escalates further, Israel attacks Iran, and Iran retaliates afterwards in a more meaningful manner than previously, which was suggested by its Supreme Leader, Ayatollah Ali Khomenei, we might see oil prices soar to $100 per barrel or more. According to the World Bank, we may witness a price increase of up to $157 depending on the scope of potential conflict.
Conclusion
The Middle East crisis remains in a hazardous position, with tensions showing no signs of easing. Any further escalation could drive up oil prices dramatically. Iran, a major player in the conflict, ranks as the third-largest crude oil producer in OPEC. Damage to its oil fields, new sanctions on Iran’s oil exports, or a wider regional conflict could severely disrupt the market's balance.