Skip to content Skip to Search
Skip navigation

Geopolitics put oil traders on edge

The conflict in Gaza has the potential to have a severe impact on world energy markets

Machine, Adult, Male Reuters/Mohamed Abd El Ghany
A driver fills his tank at a petrol station in Cairo, Egypt. The International Energy Agency says oil markets are 'on edge'

Global oil traders are hooked on their news feeds, watching events unfold in the Middle East to see which way crude prices go next.

Not many see any downward movement from the $90 level in the weeks and months ahead.

The conflict in Gaza comes at a particularly sensitive time for oil markets. Months of cuts by the Saudi-Russia led Opec+ alliance, added to slow but appreciable recovery in big economies like China and the USA, have created a very tight market indeed.

Some experts predict a deficit of supply over demand in the second half of this year, continuing into 2024.

One indication of the paucity of oil on the market is the status of the US strategic petroleum reserve – down to its lowest level for 40 years, according to the Energy Information Administration recently.

In normal circumstances, Opec+ would be thinking of turning the taps back on at the end of the year when the current schedule of cuts expires. They have achieved their aim: Brent crude prices have recovered from the summer lows of near $70.

But these are far from normal circumstances. Although the conflict in Gaza does not pose any immediate threat to Gulf production or export, it all depends where it goes from here. Some commentators have talked about a doomsday scenario in which crude hits $200 a barrel, sparking a “global economic crisis”.

We are nowhere near that yet, it must be stressed, and it may never come to pass. Israel, Egypt and Lebanon – the three counties immediately in the firing line – are marginal players in global energy markets and eastern Mediterranean energy, mainly gas anyway, will not be missed from the crude equation.

Nonetheless, the conflict in Gaza is so unpredictable with so many possible scenarios unfolding, that it has the potential to have a severe impact on world energy markets.

As Capital Economics, the London consultancy, said: “The longer the conflict goes on, or the more widespread it becomes, the greater these risks will be.”

The International Energy Agency echoed that message. “A sudden escalation of geopolitical risk in the Middle East, a region accounting for more than one-third of the world’s seaborne oil trade, has put oil markets on edge,” they said.

Iran is at the heart of most of the calculations oil traders are currently making.

Analysts and policymakers are still assessing how much responsibility lies with Tehran for the initial attacks by Hamas. If it emerges that there was direct culpability, the least the Biden administration can be expected to do is to pull the shutters down on Iranian oil exports.

Washington has for some time been content to turn a blind eye, allowing Iran to produce and export crude, mainly to China and India, as long as it was in competition with Russian Urals, which of course the Americans are hoping to keep off global markets.

If the West was able to completely interdict Iran exports – a very big if – it would leave a big hole in global oil supply. Iran’s production is at a five-year high of over 3 million barrels a day (although it is difficult to say precisely how much of that goes for export). 

From there, the action could snowball quickly. If Hezbollah, the Iranian-sponsored group in the south of Lebanon, gets involved, that would make a wider conflict much more likely, even the possibility of direct Israeli-Iranian military confrontation.

In that case, Iran would surely be tempted to close the Straits of Hormuz entirely, especially if by that time its own exports were being blocked by the US.

The immediate impact on crude prices of such a move is almost impossible to calculate, but the prospect of an emotionally-led short-term spike to $200 a barrel level cannot be ruled out, though $150 is a fairer reflection of the market maths. 

Of course, we are nowhere near that situation at the moment. All the major oil analysts are sticking with their pre-Gaza estimates for the end-of-year price, which vary between a bearish $85 to $90 from Capital Economics and Citi, to a bullish $107 from Goldman Sachs.

But you get the feeling though that the next phase of global oil price movements will not be guided by cold-headed analysis, but by heat-of-the-moment trader reactions.

Many of these traders still remember the old market adage: “Buy on the sound of gunfire.”

Frank Kane is Editor-at-Large of AGBI and an award-winning business journalist. He also acts as a consultant to the Ministry of Energy of Saudi Arabia

Latest articles

Turkey foreign property sales

Foreigners turning back on Turkish real estate

Foreign buyers are increasingly shunning the Turkish property market, wary of high prices, the expensive cost of living and a less welcoming environment for overseas real estate investors. There were only 2,064 residential units sold to foreign buyers in May, 35 percent down on the same month last year, data issued by the state statistics […]

Adult, Male, Man

UAE to invest in Turkey’s economic sectors says minister

The UAE is willing to invest across numerous sectors in Turkey, said Emirati energy and infrastructure minister Suhail Al Mazrouei. The Gulf state is exploring opportunities in the energy, agriculture, transportation, tourism and other sectors, state-run Anadolu Agency (AA) news agency reported, citing the minister on the sidelines of the St. Petersburg International Economic Forum. […]

Rothschild Saudi

Edmond de Rothschild to run funding vehicle for Saudi projects

The Edmond de Rothschild Group is establishing a funding vehicle for infrastructure projects in Saudi Arabia along with the local firm SNB Capital, as part of a deal in which the Swiss investment bank will set up offices in the country.  Saudi Arabia’s massive economic diversification programme has run into financial obstacles as it faces […]

2KEY8G1 Emirates Airline Airbus A380 aircraft landing. Aerial view of Emirates Airlines A380-800 airplane. An Emirates plane coming in to land at LAX; a spokesperson for Emirates said the contraventions were for safety reasons

US fines Emirates for operating in prohibited airspace

Emirates has been fined $1.5 million by the US Transportation Department for operating flights carrying JetBlue Airways’ JBLU.O designator code in prohibited airspace. The transportation department said that between December 2021 and August 2022, Emirates operated a significant number of flights carrying the JetBlue Airways code between the United Arab Emirates and the United States […]