CAIRO - 15 April 2024: Despite all the looming risks, there are still significant possibilities that the conflict between Tehran and Tel Aviv will not greatly and severely impact the movement of global crude oil prices, according to a research paper published by the Egyptian Center for Strategic Studies (ECSS).
The ECSS stated that the recent disturbances in the region have not led to sustained and prolonged increases in global oil prices. However, the current conflict between Tehran and Tel Aviv poses one of the largest geopolitical risks to global oil markets since the start of the Russo-Ukrainian war and the war on Gaza. This is because any war in the Middle East poses a potential threat to oil supply security and energy security in general.
“A conflict involving Tehran could have even more serious ramifications for global oil markets because there is one definite outcome that threatens oil supplies: an increase in its price. Therefore, since the start of the war on Gaza, discussions about global energy security and energy supplies have focused on Iran and its oil position in global energy markets,” it added.
The Iranian attack on Israel on Saturday resulted in global turmoil, with condemnation and warnings about the escalation of events in the Middle East. This could lead to instability and insecurity in the region, as well as have a direct impact on price increases in the area and the region.
Impact of the Iranian attack on global energy prices
The Egyptian Center for Strategic Studies (ECSS) explained in the research paper that the term "global energy security" is not new in international politics; conflicts over global energy resources have been a significant element in the international corridors of major powers for a long time. However, this term has now become one of the most important elements of global security due to the limited nature of non-renewable energy resources and the imbalance in their distribution globally.
The ECSS pointed out that oil prices are affected by events that are not directly related to supply operations, starting from geopolitical events such as regional or geopolitical instability, especially when it comes to major oil sources such as the Middle East. Additionally, the Middle East is an area of significant importance on the international stage, and its influence extends to a variety of fields, including economics, politics, and global security. Its challenges and events play a crucial role in shaping the modern world and its future, especially concerning global energy security.
Global markets hold their breath
For several days, global crude oil prices remained hostage to escalating concerns over a potential Iranian response to the attack targeting the Iranian consulate in Damascus. This was amidst various scenarios about the extent of Tehran's response and its impact on crude oil price levels, as well as concerns related to the consequences for the movement of crude oil through maritime straits in the region, especially the Strait of Hormuz. However, the Iranian attack on Israel, contrary to many expectations and estimates of having a significant impact on global crude oil prices, resulted in global markets holding their breath in anticipation of this response. Nevertheless, the impact remained limited and relatively restrained compared to previous expectations.
The Strait of Hormuz connects oil-producing countries in the Arabian Gulf with refineries around the world. It is a vital passage for approximately 18.5 million barrels per day of crude oil and important petroleum products, equivalent to about one-fifth of the world's crude oil shipments. Through the movement of crude oil, it handles more than one-third of global maritime oil exports, accommodating approximately 30 oil tankers daily. Saudi Arabia exports around 88 percent of its oil production through it, while the UAE exports 99 percent, and Iraq 98 percent. Iran, Kuwait, and Qatar also export all their oil through it. Japan, China, South Korea, India, and Singapore are the largest importers of oil passing through the strait.
Impact of the Iranian attack on oil supplies in the region
The center affirmed that the attack would have an impact on the axis of oil supplies in the region amid fears that these consecutive events would lead to increased tensions in the Middle East. This is related to a major player in the crude oil markets, which may affect the production of major oil producers. At a time when there is much talk about Iranian oil entering the game, posing an important question: Will the recent escalation, albeit limited, affect global crude oil markets? And what is the significance of Iranian oil?
Iran possesses significant reserves of crude oil in the world, ranking among the top producers of oil globally. It ranks third after Venezuela and Saudi Arabia among OPEC countries in terms of confirmed oil reserves. Iran's total extractable crude oil reserves are estimated at about 157.8 billion barrels until the end of 2022, in addition to owning 21 gas refineries and 10 oil refineries, and it has the technical capabilities to build other refineries.
Regarding the impact of tensions and ongoing events on Iranian oil, Tehran struggles to cope with sanctions. Although the destinations and quantities of Iranian oil sales are unclear, Washington could disrupt oil sales and transfer revenues to Iran if the crisis reaches boiling point. If Iran closes the Strait of Hormuz, oil tankers in this region will suffer, and the Middle East region will be significantly affected.
Iran's oil production has increased by over 700,000 barrels per day since the beginning of the current year, reaching its highest levels in five years at around 3.2 million barrels per day. Tehran benefited from easing tensions with Washington, and if the US administration refrains from cutting off Iranian oil exports, this may change during the coming period, linking some to the Biden administration's desire to curb rising crude oil prices. The crisis has not yet reached boiling point because there are only bilateral threats. Saturday’s events may be a warning to crude oil markets, but this will restrict the movement of entry and exit from the Strait of Hormuz and affect oil prices.
Crude oil price movements and expected repercussions
Since the beginning of 2024, global oil markets have witnessed instability. The recent developments in the Middle East, particularly the aftermath of the war on Gaza, have reflected a new trend in crude oil price movements and the global energy scene in general. Crude oil prices ended last week on an upward trend during weekly trading sessions.
This came in response to escalating fears and tensions in the Middle East. However, they recorded weekly losses due to several reasons, including negative expectations from the International Energy Agency about the growth of global demand for crude oil, in addition to concerns about the slowdown in US interest rate cuts, as well as estimates related to global crude oil demand, as well as demand in China (about 1.3 million barrels per day of crude oil).
However, Brent crude futures rose by 70 cents, reaching $90.5 per barrel, while West Texas Intermediate (WTI) crude futures rose by about 10 cents to $85.7 per barrel at the close last Friday. Brent crude fell by 0.8 percent on a weekly basis, compared to a drop of over 1 percent for US crude.
It is worth mentioning that before the targeting of the Iranian consulate in Damascus earlier this month, oil prices were trading around $85 per barrel for West Texas Intermediate crude futures for May delivery and $88.9 per barrel for Brent crude.
On April 5th, Brent crude surpassed $90 per barrel for the first time since mid-last year under the pressure of geopolitical developments in the Middle East.
At the end of the week before last, oil prices recorded weekly gains after Tehran's promise, being the third-largest producer in the Organization of the Petroleum Exporting Countries (OPEC), to respond. US crude oil futures ended the week at $86.9 per barrel, and $93.2 per barrel for Brent crude.
The Middle East region holds about 75 percent of the world's crude oil reserves (high quality), and the importance of the Middle East is a significant axis in the crude oil industry because 90 percent of the growth in oil supply will come from the region, a major source. The Middle East and North Africa region own about 57 percent of confirmed crude oil reserves and 41 percent of natural gas.
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