The spiraling conflict between Israel and Iran has sent shock waves through the oil market, increasing prices as investors grapple with potential disruptions to the global oil supply.
Oil prices have jumped since Iran fired about 200 ballistic missiles at Israel last week. Brent crude, the international benchmark, surpassed $81 a barrel in the days afterward, a gain of about 15 percent. It traded around $79 a barrel on Friday.
Despite the growing apprehension among traders, prices are lower than they were as recently as July — and unusually subdued for a time of such geopolitical tension. “In a normal world, this would have gone skyrocketing,” Fatih Birol, the executive director of the International Energy Agency, said during a webinar on Wednesday.
Instead, prices are being weighed down by factors like slowing demand in China, increased production in the United States and other countries, and the expectation that the OPEC Plus cartel could soon put more oil on the market.
But analysts say Israel could attack Iranian oil facilities or other sensitive infrastructure, leading Tehran to lash out at important targets. That could seriously disrupt oil production — something that has not happened during the past year’s conflict in the Middle East — and push prices higher.
“We’re probably getting into a cycle of Israel on Iran, you know, volleys, if you will, and attacks,” said Bob McNally, the president of the research firm Rapidan Energy Group and a White House energy adviser in the George W. Bush administration. “And once that gets going, all bets are off.”
Mr. McNally said that what he called “material and prolonged interruption of energy flows from the Persian Gulf region” would send oil prices well above $100 a barrel, most likely causing a global recession.
In the worst case, he estimated, a third of the volumes of the global crude oil exported by sea — as well as vital flows of liquid natural gas from Qatar — could be bottled up because of actions by Iran or its proxies.
Despite such dire scenarios, prices remain moderate and well below the level of more than $120 a barrel reached in 2022 after Russia’s invasion of Ukraine.
Analysts say the markets are juggling immediate fears about outages stemming from the conflict with longer-term concerns about the fundamental weakness in oil.
It is not as if oil were becoming obsolete. Demand is expected to grow this year, but by about only half the 2023 rate. The level of storage in tank farms worldwide is also relatively low, a sign of health.
Oil producers and traders are concerned that the demand for crude and products like gasoline is not what it used to be.
“This year’s deceleration may mark the start of a period of progressively more sluggish gains in oil consumption,” the International Energy Agency wrote in a recent commentary.
The era when China was the main source of oil growth appears to have ended, with no replacement in sight. Demand in China, the mainstay of oil consumption increases for two decades, has turned tepid as electric vehicles proliferate and other economic changes occur.
Demand is also weak elsewhere, with electric vehicles, fuel efficiency and social trends like working from home playing a role.
In addition, markets are aware that OPEC Plus is holding more than five million barrels a day, or about 5 percent of global demand, off the market.
Traders have been worried about an agreement in June by eight countries led by Saudi Arabia — all members of OPEC Plus — to begin gradually unwinding some oil production cuts this fall.
Facing downward price pressures, this group recently agreed to wait until at least December to begin the increases. But traders know that over time, more oil is almost inevitably going to come back on the market.
The Saudis are trying to prepare the way for these additional supplies by shaming other members of OPEC Plus, including Iraq and Kazakhstan, to conform to their agreed quotas. The Saudis, analysts say, want to avoid assuming the whole burden of necessary adjustments.
“They don’t want anyone to think that it is up to them to do it on their own,” said Richard Bronze, the head of geopolitics at Energy Aspects, a research firm. He added that the Saudis and their allies would probably prefer to start increasing output in December as planned.
Many of those decisions are likely to depend on whether the other countries comply with quotas. Otherwise, the Saudis reserve the right to add a large amount of oil unilaterally at some point.
At the same time, prices are being held down as supply continues to edge up from countries outside OPEC Plus, including the United States. In September, before the latest flare-up in the Middle East, worries about an oversupply briefly sent prices below $70 a barrel for the first time since 2021.
For now, though, the focus is on the possibility that Israel might attack Iranian energy facilities such as the main export terminal on Kharg Island.
Iran is a sizable oil producer, pumping out 3.4 million barrels a day, or more than 3 percent of world supplies, and exporting about 1.6 million barrels a day. If outages are limited, their impact would be mainly felt in China, where small refiners buy most of Iran’s exports, ignoring international sanctions on Iranian oil.
“Any disruptions to Iranian oil supplies will likely push oil prices above $80 a barrel,” FGE, a consulting firm, wrote in a recent note. But if energy facilities go unscathed, prices may ease back to $70 a barrel, the firm added.
Another concern is that Iran could strike other targets. In 2019, missiles hit a crucial processing node at Abqaiq in eastern Saudi Arabia and other installations. Iran was blamed for the attack, but it denied responsibility.
In the years after those attacks, the Saudis improved relations with Iran, possibly providing some protection against a similar attack. “The rapprochement between Saudi Arabia and Iran may forestall an Iranian attack on Saudi infrastructure,” said Helima Croft, the head of commodities at RBC Capital Markets, an investment bank.
Officials from the Arab states in the Persian Gulf met with Iran’s president in Qatar last week in an effort to avoid becoming entangled in the conflict.
The gulf countries are trying to keep themselves off Iran’s target list not least because their economic development ambition “requires a sustained absence of conflict,” analysts at J.P. Morgan wrote in a research note. The Iranian government also values its improved ties with Saudi Arabia and other states in the region, analysts say.
In addition, the Biden administration would be wary of actions that might cause U.S. gasoline prices to rise in the weeks before the presidential election in November.
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