Interview
October 11, 2024
On October 2, Iran launched around a hundred missiles at Israel, hitting Tel Aviv in particular, in response to the death of its ally, Hezbollah leader Hassan Nasrallah. This progressive regionalization of the conflict, feared since the attacks of October 7, risks intensifying even further if, as is likely, the Jewish state undertakes to respond further to Iran’s attack. Among the possibilities mentioned, let us cite in particular that of targeting Iranian oil sites. To what extent are the oil markets, already impacted since the start of the conflict, influenced by this escalation of violence in the Middle East? How is the United States reacting to this situation? What could be the consequence on the global balances of the oil market? The point of view of Francis Perrin, research director at IRIS, specialist in energy issues.
The escalation of tensions in the Middle East, particularly between Tehran and Tel Aviv, has led to an increase in oil prices of almost 9%. How has the price of oil changed since the start of the war in Gaza? What was the impact of this conflict and its recent regionalization on the black gold market?
Since the start of the war in Gaza a year ago, the price of Brent oil has fluctuated in a wide range between a little less than $70 per barrel (about a month ago) and more than $90/bbl ( in October 2023 and spring 2024). This amplitude of around $25 is significant, but it is much lower than that which was observed at the start of the war in Ukraine.
Prices increased immediately after October 7, 2023 before falling sharply until the end of November-beginning of December 2023. They then rose sharply again until spring 2024 and then fell to a low below 70 $/b around September 10. The recent situation in Lebanon, the clash between Israel and Hezbollah, the Iranian strikes against Israel on 1is October 2024 and the expectation of an Israeli response have pushed black gold prices back above $80/bbl. Before that, the bullish phases were linked to fears that the conflict in Gaza would spread to other areas of the Middle East, which unfortunately happened, and to attacks by Yemen’s Houthis against merchant ships in Red Sea. The bearish phases can be explained by the hope, at the start of the conflict, that the military involvement of the United States for the purposes of deterrence and its diplomatic action to try to find a political solution would generate positive results and, more recently, by the concerns of the oil markets about the global economy, in particular the Chinese economy. Remember that China is the second largest consumer in the world and the largest importer of oil.
On October 9, 2024, at the end of the day, Brent had fallen to around $76.60/bbl. Now everyone is waiting to see when and how Israel will strike Iran. One of the key questions for traders is: will there be oil and energy targets in the Israeli response and, if so, what will they be? Another crucial point is how big this response would be. Finally, the third key subject is Iran’s possible response to the Israeli response to the Iranian strikes of 1is october.
In light of the US presidential election, what is Washington’s reaction to this increase and the fear of a potential Israeli response? What analysis can we make of Washington’s capacity to influence the oil sector compared to that of the members of OPEC+?
The Biden administration “advised” Israeli leaders not to retaliate too forcefully so as not to generate further escalation and indicated that it was not in favor of striking nuclear and oil targets. For oil, the American motivations are as follows: such strikes would raise oil prices, and therefore fuel prices, which would not be a gift for Kamala Harris in her duel with Donald Trump; the rise in crude prices would be good news for Russia which needs a lot of money given the war in Ukraine; Iran could retaliate, as some Iranian officials have indicated that Israeli strikes against Iran’s oil and/or nuclear power would be red lines; and there are fears that oil assets in other Middle Eastern countries could be negatively affected by this rise in tensions. Of course, this vision of the Biden administration would not at all be that of a possible Trump administration.
The United States is currently the world’s largest oil producer ahead of Russia and Saudi Arabia in that order. This country has never produced so much oil in its entire history and, even more importantly, no other country has produced at such a level in all of world oil history. Their crude oil production exceeds 13 million barrels per day (Mb/d) out of a global production which will be around 103 Mb/d in 2024. The weight of this country is therefore very significant in oil terms. That said, OPEC, which brings together 12 countries, produces at least 27 Mb/d and OPEC+ (22 countries) 41-42 Mb/d. Without forgetting that OPEC+ production capacity is a little more than 6 Mb/d higher than its current production. We therefore cannot ignore this coalition even when we are the United States.
OPEC+ member countries (notably Saudi Arabia and Venezuela), United States, Russia, China… What are the prospects and main challenges for these players in the oil and gas sector? Is a gradual recomposition of supply and international flows taking place or not?
There has already been a recent restructuring of international oil flows, but it was linked to the war in Ukraine and not to that in Gaza. The actual oil impacts of this second conflict are, to date, much less strong than those which followed February 24, 2022. The European Union decided in 2022 to do almost completely without crude oil and refined products from Russia and has therefore turned more towards North America, the Middle East and Africa to satisfy its oil needs. For its part, Russia has turned more towards Asia for its oil exports, with China and India in the lead. The war in Gaza has had, until now, much more limited oil impacts, but we have to see what will happen between Israel and Iran, the second country controlling enormous oil reserves and being the seventh or eighth world oil producer.
Venezuela controls the largest proven oil reserves in the world ahead of Saudi Arabia and Iran. But its production is very low compared to this enormous potential: only around 900,000 b/d, or ten times less than Saudi Arabia… This can be explained by the economic collapse of this country for several years. He is therefore not particularly well placed to pull the chestnuts out of the fire. The United States, OPEC+ and, within that alliance, countries like Saudi Arabia and the United Arab Emirates are in a much more favorable situation. But OPEC+ faces serious challenges. Without the war in Gaza and its spread across the Middle East, crude prices would be significantly lower than they are today, as growth in global oil demand is slowing and supply is plentiful. There is a geopolitical premium in current crude prices and this would disappear if political solutions to tensions and conflicts in the Middle East were found tomorrow. But unfortunately this is not a very credible scenario in the short term.
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