Oil markets take wait-and-see approach amid Israel-Iran tensions

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DUBAI — Despite the Middle East accounting for about one-third of the world’s oil production, the impact of ongoing Israel-Iran tensions is yet to be felt on oil markets. 

The increase in regional tension following the Oct. 7 Hamas attack on Israel and the ongoing escalation between Israel and OPEC oil producer Iran have so far failed to increase oil prices. Crude oil ended the trading week on Friday at roughly $80 per barrel, down from $84 per barrel in the trading week that ended just hours before the Oct. 7 attack.

Oil markets have taken more of a "wait and see" approach since the Gaza war started as commodity traders have chosen to wait for an actual disruption in supply routes to occur before pushing prices higher. 

'The market does not panic'

“The market will keep an eye on developments in the Middle East, but the spike in tensions or rhetoric between Israel and Iran is not reason enough for a jump in oil’s risk premium,” said Vandana Hari, founder of Vanda Insights, a Singapore-based energy markets consultancy. 

“The market does not panic when there are geopolitical events in the Middle East anymore,” said Ben Cahill, non-resident fellow at the Arab Gulf States Institute in Washington, referencing the pre-digital age. He told Al-Monitor that oil markets have fundamentally changed as real-time data helped them balance “physical realities against low probability of geopolitical risks.”

Still, the risk of war looms large. Iran reiterated on Sunday its determination to hit back at Israel, which it says was behind the killing of Hamas’ political leader Ismail Haniyeh in Tehran on July 31. “The probability of further escalation is high, but the risk of serious disruption of oil supplies is ... less likely, but not impossible,” said Robin Mills, CEO of Dubai-based consultancy Qamar Energy. 

He told Al-Monitor that triggers that would move oil prices higher include attacks against Gulf oil facilities or crude oil tankers, or more severe sanctions against Iran (the Islamic Republic has proved adept at finding alternative export routes to evade sanctions). Still, he calls the scenario a “low probability, but high impact event.”

Macroeconomics vs. geopolitics

The return of more supply to the market later this year amid rising recession fears that could lower oil demand has so far been the dominant force driving oil prices. In June, OPEC+ agreed that beginning in October it would start to roll back oil output cuts that have been in place since last year — other cuts will remain in place until the end of 2025 — triggering concerns that it could cause oversupply and a drop in oil prices. 

The demand outlook remains uncertain as weaker-than-expected unemployment data released this month in the United States have revived recession fears. Such fears caused wild swings in oil prices last week. “Crude’s recent plunge and recovery has been entirely driven by the roller coaster in sentiment over the US economy,” Hari said. According to data compiled by Bloomberg, hedge funds have started to bet against commodities this past week for the first time since 2016.

Not everyone buys into fears of low demand, though. The CEO of Saudi fossil fuels company Saudi Aramco downplayed concerns on Tuesday after it posted a 3.4% drop year-on-year in net profit in the second quarter to $29 billion due to lower oil exports and weakening refining margins. Amin Nasser said the company sees global oil use reaching an all-time high of 106 million barrels a day in 2025. “The market is reading too much into the short-term responses and the news coming from the US with regard to the number of jobs for the month,” he said.

The cost of lower prices

OPEC+ is not bound by its plan to bring back supply to the market. The oil cartel wrote in a June statement that the lifting of output cuts “can be paused or reversed subject to market conditions.” But a delay would hurt Gulf states that expect to reap benefits from additional oil exports.

Oil exports still account for the lion's share of Gulf government revenues. Uncertainty over future oil receipts complicates Gulf countries' decision of which economic diversification projects to invest in, in particular in Saudi Arabia, where hundreds of billions of dollars are needed to fund Vision 2030. When Public Investment Fund’s capital expenditures are accounted for — the main engine of Vision 2030 funding — Saudi Arabia needed oil priced at $109 in the first quarter of 2024 to balance its budget, according to Bloomberg estimates.