Oil Prices And Tension In the Middle East

As elevated interest rates and high inflation already tormented the global economy, the conflict in the Middle East that erupted a few days ago may have added another factor problem that policymakers and market participants around the world may have to take into consideration: oil prices.

The geostrategic developments in Israel made oil prices jump on October 9th by almost 4%, generating discussion over the future of energy prices in the event of a prolonged conflict that could impact the monetary policies of countries across the world. Although prices fell in the next three days, financial markets are still worried as they monitor the events in the region.

If you’d like to learn more about what market analysts forecast regarding oil prices, please read our article.

Oil Prices: The Oil Crisis And The Yom Kippur War In 1973

The Levant region is infamous for the geopolitical tensions in the last few decades. While the last massive conflict took place in 2006, there have been a number of lower intensity tensions that kept local populations on their toes.

Historically, the war that has been associated with oil prices is the Yom Kippur War in 1973. The conflict started on the day of Yom Kippur (Oct. 6th) when military forces from several Arab countries crossed the borders with Israel. The war lasted two weeks and five days with the two super powers of that time, the US and the Soviet Union, resupplying their allies. Despite the severe difficulties that Israel faced in defending its territories, it emerged victorious.

In October 1973, the Organisation of Arab Petroleum Exporting Countries (OAPEC) led by Saudi Arabia announced an oil embargo against countries that supported Israel in the war. The embargo lasted for six months, sparking the 1973 oil crisis as it is known in history. The end of the embargo found oil prices raised by 300%.

As a result, large engine cars primarily produced in the US stopped selling, countries impacted by the embargo were forced to preserve energy while reductions in consumer demand had an effect on economic growth rates. Some economists suggest that the oil crisis of 1973 was a primary factor for the stock market crisis of 1974.

A New Oil Crisis Before Us?

The answer is that it would be too early to know and that many factors should be involved to determine the prices of oil in global markets. The 4% price jump recorded on Monday was followed by drops on Tuesday, Wednesday and Thursday (Oct. 10-12) as investors were cautious regarding the way that the crisis could escalate.

The Middle East conflict comes as an add-on to the already implemented oil production cuts by Russia and Saudi Arabia. The two countries have agreed to cut oil production by a combined 1.3m barrels, a bit more than 1% of global demand, until the end of 2023. On October 11th, Russian President Vladimir Putin suggested that the cuts would likely continue as scheduled despite market concerns regarding a new oil prices’ hike. However, Saudi Arabia vowed to proceed with the necessary actions that would stabilise the market.

In August, the US eased Iranian oil restrictions as crude oil supplies could not support global demand, drawing down US oil reserves into record lows. According to the latest report by the Strategic Petroleum Reserve (SPR) inventory still sits at a near 40-year low of 351.3 million barrels. A Reuters report citing American Petroleum Institute data and published on October 12th, said that U.S. crude oil stockpiles rose by 12.9 million barrels in the last week, much higher than the 500,000-barrel gain expected by analysts polled by Reuters.

In the meantime, the International Energy Agency (IEA) raised the global oil demand growth forecast for 2023 noting in its report that it could come in at 2.3 million barrels per day (bpd). However, the IEA downgraded the oil demand growth for 2024, from 1 million bpd to 880,000 bpd. Analysts at IEA noted that lower demand has been reflected in the oil price pullback recorded in September.

What Do Analysts Suggest Regarding Oil Prices

The International Monetary Fund (IMF) said that it would be monitoring the situation in Israel, Gaza very carefully, adding that it would be too early to assess the economic impact. The IMF’s chief economist, Pierre Gourinchas, suggested that a 10% increase in oil prices would weigh down on global output by about 0.2% in 2024 whilst boosting global inflation by 0.4%.

ING’s analysts stressed the potential role of Iran in the conflict, writing in their report: “The risk premium continues to erode with the conflict largely contained to Israel and Hamas. Reports that the Iranian government was surprised by the Hamas attack may also ease concern that the US will enforce sanctions against Iran more aggressively, although there have been conflicting reports in recent days regarding Iran's involvement.”

ANZ Bank analysts suggested that “increasing geopolitical risk in the Middle East should support oil prices... higher volatility can be expected." Energy market analysts at Credit Suisse noted that "the risk premium on oil is rising due to the prospect of a wider conflagration that could spread to nearby major oil producing nations such as Iran and Saudi Arabia."

Economists at the Commonwealth Bank stressed the role of Iran as an oil producing country and the impact of potential sanctions against it. “If we start seeing the United States point the finger at Iran, we could see Iran's oil exports start falling. And that is our biggest concern right now when we're looking at oil markets and the implication of this conflict,” they noted. Commonwealth Bank’s analysts suggested that Iran's oil exports could fall by 500,000 to 1 million bpd, if the US moves forward with implementing sanctions; such a supply limitation could amplify the oil supply issues observed after OPEC’s decisions.

Risk Management When Trading Oil

Oil is one of the most popular commodities among traders. In times of economic turmoil, traders tend to add oil to their trading portfolios as many consider it a safe haven asset. However, as beginner traders may not have the knowledge level to identify opportunities and the right timing, it would be best to focus on educating themselves on matters of trading. There is no lack of resources as many brokers and educational hubs offer a range of materials such as how-to guides, webinars, articles that could help beginner traders increase their knowledge.

Learning how to trade is not the only factor that could play a role in the execution of a successful strategy. A sudden or unexpected market downturn could cost money and derail any trader’s plans. Therefore, traders who have just begun their trading journey should devote some time to learning how to use risk management tools such as the stop-loss order that are broadly available in modern trading platforms. Invest in your knowledge before you start trading to save funds, reduce stress and enjoy the journey that has just started.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.