Oil Prices Don’t Need War in the Middle East to Keep Rising
Hopes that oil supply might ease a bit next year, and inflationary pressures with it, are fading after Saturday’s shock attack on Israel.
On Monday, Brent crude futures rose about 4% to $88 a barrel as traders sized up the potential impact on global supply of a new war in the Middle East. Neither Israel or Palestine are major oil producers, so there isn’t an immediate effect. However, Iran’s Islamic Revolutionary Guard Corps helped Hamas plan Saturday’s assault on Israel, The Wall Street Journal reported. If Tehran’s involvement is confirmed by U.S. officials, the Biden administration will likely take a much harder line on Iranian oil supply than it has in recent months.
At the start of this year, Iran was producing around 2.5 million barrels of oil a day, according to data from the International Energy Agency. By August, production had risen to 3.1 million barrels a day as the U.S. and Europe eased enforcement of sanctions on the country’s oil exports, probably because they were worried that rising energy prices would lead to another unwelcome bout of inflation.
If a lax approach to Iranian shipments is now untenable, an oil surplus expected in the first quarter of next year probably won’t materialize, and the global market could be short up to 2 million barrels a day later in 2024, according to Warren Patterson, head of commodities at ING. He points out that Russia would potentially benefit from a crackdown on Iranian barrels, as Moscow might step in and supply the Chinese refineries that currently buy Tehran’s crude.
The latest violence also jeopardizes a White House-brokered deal that would see Saudi Arabia recognize Israel in return for a defense pact with the U.S. During negotiations, Saudi Arabia signaled that it was willing to increase oil production next year as part of the bargain.
Without a deal, Saudi’s interests aren’t as aligned with the U.S., says Neil Beveridge, senior energy analyst at Sanford C. Bernstein. The kingdom, which needs oil prices to remain above $80 a barrel to balance its budget, may feel less pressure to reverse the 1-million-barrels-a-day voluntary production cuts that are due to expire in December. However, Saudi Arabia faces a balancing act: It needs the oil price to remain high, but not so high that it destroys demand.
Even before war broke out between Hamas and Israel, the oil market looked tight. The world will be short by more than 1 million barrels a day for the rest of the year because of restrictive OPEC+ production policies and additional voluntary cuts by Saudi Arabia and Russia. Last week’s drop in oil prices, owing to worries about Chinese growth and low U.S. gasoline demand, always looked to be short-lived.
While the geopolitical fallout of Hamas’s actions over the weekend is still unfolding, risks to global oil supply are already back on the table.