Geopolitical turbulence in Middle East rattles oil markets: a look at long-term implications

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Last weekend’s attack from Iran against Israel has not changed the fundamentals of gas and oil prices. However, energy experts worldwide are warning against possible implications on the global oil and gas markets in the long term if, what have been defined as the worst-possible scenarios will materialise.

“As an Iranian retaliation became imminent in the run-up to Saturday, oil prices started to increase,” said Rystad Energy’s Senior Vice President, Jorge León, indicating that the observed 10 per cent increase could almost entirely be attributed to the ongoing conflict. “The big question now is where do we go from here? […] The implications for the oil markets would be very significant.”

Then, oil prices fell, but all eyes remained on the Middle East. “A spike in prices didn’t materialise because the response was well-telegraphed, meaning the market had time to bake in any risk to crude supplies,” said Mr León. “As the risk to supply is waning and a military response from Israel looks less likely as more time passes, prices are holding steady. One thing is for certain: volatility is here to stay.”

In a worst-case scenario analysed by Rystad Energy, a forceful retaliation by Israel could trigger a spiral of escalation, under which geopolitical premiums would increase significantly. Moreover, a new round of US sanctions on Iran and stricter enforcement could further impact market prices.

“Another significant unknown is how OPEC+ would react in this scenario,” continued Mr León. “Currently, the group has extended its voluntary production cuts until the end of June. […] With almost 6 million barrels per day (bpd) of spare capacity, the group could easily increase production to limit upside price pressure if the conflict escalates.”

According to him, they probably would, first of all to not weaken global economic growth; second, to not prompt a global energy crisis with long-lasting implications; and finally to not be too much involved in politics, as OPEC has often emphasised, “the organisation is not a political entity.”

Also the International Energy Agency (IEA) is looking at the Middle East right now, especially after releasing its latest Oil Market Report on 12 April.

“Mounting tensions in the Middle East spiked further […] raising the risk of increased volatility in oil markets and providing a fresh reminder of the importance of oil security,” read the IEA’s press statement.

According to the Report, the Brent international oil price benchmark breached the threshold of 90 US dollars a barrel earlier this month, reaching its highest level since October 2023 amid the heightened tensions between Israel and Iran. The sustained output curbs by OPEC+ mean that non-OPEC+ producers, led by the Americas, are expected to continue driving world oil supply growth through 2025. Additional volumes from the United States, Brazil, Guyana and Canada alone could come close to meeting world oil demand growth for this year and next. At the same time, the Report found that global oil demand growth is currently in the midst of a slowdown. According to the latest forecasts, it’s expected to ease to 1.2 million bpd this year and 1.1 million bpd in 2025 – bringing a peak in consumption by the end of this decade into view.

The geopolitical climate in the region is also being closely monitored for the potential disruptions to the trade flows through the Strait of Hormuz (which currently contributes to 11.7 per cent of Europe’s and 24.4 per cent of Asia’s LNG imports) which could remove significant amounts of gas and oil from the global market.

“The Straits of Hormuz is a crucial artery for Qatar and the UAE to reach both European and Asian markets. As tensions simmer, global energy dynamics have a lot at stake, knowing that any added disruption could send energy prices shooting upward,” commented Rystad Energy’s senior analyst, Lu Ming Pang. “At the moment, fundamentals in the gas and LNG markets have not changed despite the retaliatory strike by Iran on Israel and prices in the global markets continue to reflect that. Nevertheless, the situation is fluid. The strategic significance of the Straits of Hormuz cannot be overstated and market participants will be closely monitoring developments in the region.”

According to Rystad Energy, there is the remote possibility that, similarly to what happened when Russia’s invasion of Ukraine removed some 90 billion cubic metres (ccm) of pipeline supply from European markets between 2021 and 2022, a wider conflict affecting trade flows through the Strait of Hormuz could result in 82.4 million tonnes (mt) or 112 bcm of LNG from Qatar and UAE being removed from the global market. In the unlikely event this happens, prices could exceed 100 US dollars per MMBtu in an already tight market caused by the ongoing Russia-Ukraine conflict.

“Gas fundamentals have not changed in the past week, with high gas storage levels and a relatively mild northern winter for two consecutive years keeping a lid on prices,” continued Lu Ming Pang. “The increase in global gas and LNG prices in April has been due to replacement demand by Japan, supply outages in the US and mild disruptions in Norwegian pipeline supply to Europe. [However] Any destabilisation in the region may heavily impact the global balance, and market players will be monitoring the situation closely.”

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