Oil Price in Focus: Geopolitical Tension in the Middle East Causes Nervousness

The eyes of global consumers, drivers, and political figures are intently focused on the oil price. The escalating conflict between Israel and Hamas, which started a year ago, has the potential to destabilize the entire Middle East region—a region that supplies one-third of the world's crude oil production. Few commodities have as direct an impact on the global economy as oil, which can also wield significant influence in crucial elections, as U.S. presidential candidates are well aware. Oil prices surged by 10% within a week after Israel attacked the Lebanese militia Hezbollah, supported by Iran, and Iran retaliated with about 200 rockets. On October 7, prices reached $81 per barrel before falling again. Two and a half years ago, Russia's invasion of Ukraine had caused oil prices to soar to over $120 when the West imposed sanctions and the world's second-largest exporter faced a potential threat to supply. If the current conflict escalates, a serious oil price shock could be imminent. However, thanks to an oversupply, the oil market is less susceptible to such shocks than in 2022. Although Israel has not yet retaliated against Iran, U.S. President Joe Biden dampened the market on October 3 by suggesting that Iran's oil infrastructure could become a target for Israel. While Iran accounts for nearly 2 million barrels per day, about 2% of global supply, there is a risk that major oil shipments in the Middle East could be disrupted if tensions escalate further. Nevertheless, the global supply appears much more relaxed today than in 2022. Back then, demand surged sharply after the end of COVID-19 lockdowns while supply was scarce. OPEC and its allies, led by Saudi Arabia, attempted to stabilize prices by curbing production, but were unsuccessful due to indiscipline and deceit. Now, the cartel has announced an increase in production starting in December. Even Saudi Arabia, typically an advocate for high prices to fund its ambitious domestic programs, has shifted away from its target price of $100 per barrel and is focusing on securing its market share. OPEC's internal disputes reflect a more fundamental shift: nearly 60% of global oil production now comes from non-OPEC countries, led by the USA, Brazil, Canada, and Guyana. According to the International Energy Agency, non-OPEC countries' production is expected to grow by 1.5 million barrels per day next year. At the same time, oil demand appears subdued. Economic performance in the U.S. and Europe is slowing after the pandemic-induced upswing, and China is grappling with a real estate crisis. As a result, on October 8, the U.S. Energy Information Administration lowered its forecast for global oil demand in 2025, citing weakening industrial activity. Combined with an expanding supply, traders expected an oversupply for 2025, which could push prices below $70 per barrel. The current oversupply offers some protection against geopolitical tensions, though not an infallible one. If Israel does target Iranian oil facilities, Iran could retaliate against oil producers allied with Israel, such as Bahrain or the United Arab Emirates, or block the Strait of Hormuz, potentially driving prices back toward the 2022 peaks. Nonetheless, the support of rising global production and easing demand provides the market with a greater buffer than ever before.