"Even paranoids have real enemies." These words of Golda Meir, Israel’s prime minister during the Yom Kippur war and oil embargo of 1973, reflect the present sentiment. Gaza, which shares a 51-km border with Israel, is now the epicentre of geopolitical tremors. Such conflicts germinate contagion fears that percolate rapidly to the broader commodity and financial markets.
In the present times of economic unpredictability and ever-changing alliances, interpreting the markets and putting a finger on oil prices is highly speculative.
The ongoing Russia-Ukraine war has lent its share of complexity to oil pricing. Production cuts by the OPEC+ group have fuelled an upward stride. With more than a third of world oil production centred in the Middle East, all eyes are focussed on the ensuing energy vulnerability. During the first few days after the devastating incursion into Israel, the markets were visibly nervous and apprehensive of supply disruptions, causing the price to move up 4 percent in sympathy. The gains were quickly pared as optimism prevailed.
A protracted Israel-Hamas confrontation is definitely combustible as it could initiate the participation of regional energy players and set oil on fire, but this seems less probable with the changed scenario of the last fifty years.
The Americans are keen to maintain a diplomatic equilibrium in the Middle East. A challenging scenario has evolved in the backdrop of an anticipated politico-economic handshake between Saudi Arabia and Israel. The White House is reluctant to let go of this opportunity, which is a result of its sustained efforts.
Crown Prince Mohammed bin Salman is “pro-active” on changing the dynamics of the Saudi economy in line with his ‘Vision 2030’, and is keen to cultivate alternative sources of revenue generation independent of oil. Aware that a protracted belligerence does not augur well for such plans, Riyadh is in touch with Tehran, prevailing on the latter to resort to a peaceful intervention in the conflict, if at all.
Should supply constraints surface, Riyadh may be willing to selectively roll back the cuts and raise output. Though much will rest on the fate and terms of the ‘held-up’ deal with Tel Aviv.
Russia has emerged as a game changer since the Ukraine war. On the sidelines of the current worsening situation, the Russian president has urged a “calming down” with the hope of averting broader participation. The recent Moscow visit of the Saudi energy minister is seen as Kremlin’s overture to the kingdom, offering collaboration in civilian nuclear power capabilities while maintaining camaraderie as an OPEC+ member amid sanctions on its oil exports.
Iran would not scuttle its long-term chances with the US and may prefer to remain in the shadows on l’affaire Hamas. It has touched its current oil production levels after a gap of five years and is desirous of increasing output in the range of six million barrels per day while aiming at a bigger world market share beyond China, its largest customer.
Tehran is keen to revive the 2015 nuclear pact with Washington, which hinges on keeping its uranium enrichment away from weapons grade; that would provide it succour from the sanctions that have long thwarted economic uplift of the Iranian people. The prisoner swap between the two nations and the promised release of $6 billion of Iran’s own oil funds that were earlier held in Seoul—now in the custody of Qatar while the US looks closer at Iran’s possible involvement—would be a precursor to such a revival.
The supply concerns may push oil prices higher in the event of a long war and some risk premiums are building up. Oil prices are bouncing around between weak sentiments of GDP growth slowdown and the current OPEC supply cuts as the Gaza tragedy adds to volatility. However, the Middle Eastern producers, who are seeing an increased flow of oil from Latin America, Canada and the US, would abstain from curbing their production beyond a certain threshold, lest they lose on their share of exports.
The world has witnessed an ideological morphosis in the last decade wherein a secular economic consolidation has taken precedence over political dominance. As renewable energy sources curry favour with the developed economies, the underdeveloped and developing economies are eager not to miss the chance of converting their ‘liquid assets’ to cash in a hurry. This entails desisting from conflicts and following the path of collaborative pursuits, a reason enough for the oil fraternity to maintain a distance from the smouldering fires of combat and resort to prudent fiscal planning devoid of armed confrontations.
The global supply is expected to get affected later this year and in early 2024 due to refinery turnarounds in the US and elsewhere. Coming out of the winter, travelling and transportation create seasonal demand for diesel and gasoline. The price could go up to $100 a barrel at that point of time.
Resting on a caveat, an escalation of tensions in the Middle East and evidence of Iran’s complicity in the current attack would prompt the US to impose stricter sanctions. Tehran may retaliate, disrupting supply channels at the Strait of Hormuz, the narrow waterway through which a fifth of the world’s oil traverses onto the Arabian Sea.
Despite American military support and indications of some European powers committed to Israel’s cause, the Hezbollah may enter the arena as they acquiesce to military adventurism and drag other players into the field. The casualty could be a simmering oil price much beyond $100. Let us for now pray that the fires are extinguished—the sooner, the better.