With the dust having settled on the latest geopolitical flare up in the Middle East, global crude oil prices have largely stayed in the range they were prior it to having happened – at 6-month highs but well shy of the psychological 3-figure price above $100 per barrel that some predicted would be hit.
For context, tensions escalated on April 1, 2024 when an alleged Israeli strike in Damascus, Syria killed 13 people, including two Iranian generals and five officers, and demolished a part of Iran’s consulate in Syria.
Among the dead was Brigadier General Mohammad Reza Zahedi, a senior commander of Iran’s Islamic Revolutionary Guard Corps’ elite overseas unit – the Quds Force – in Syria and Lebanon, who had alleged links to terrorist group Hamas with whom Israel has been at war since October 7, 2023.
It followed a first-ever retaliatory attack by Iran on Israeli soil on April 13 with some 300-odd drones and ballistic missiles. Most of these were shot down by Israel Defense Forces in partnership with the U.S., U.K., Jordan and other allies.
Despite calls for restraint, the Israelis then launched their own alleged counterattack on Iran’s central province of Isfahan on Friday (April 19, 2024) which is home to Tehran’s controversial nuclear program. For now, both the region as well as the oil market, can breathe a sigh of relief.
That’s because the Israeli action appears to be limited in scope and designed deliver a warning rather than material damage. Furthermore, whatever material damage occurred, as observed via satellite imagery, was downplayed by Iran. No lives were lost on either side, according to official statements.
Subsequently, Brent crude prices slid to around $87.20 per barrel on Friday, well down from an intraday high of $92 per barrel on April 12. Admittedly, Friday’s closing price is still near the highest levels seen since October 2023. But it is also a considerable softening which may appear quite out of sync with a severe and unprecedented escalation. There are several reasons for this.
Firstly, despite a dangerous escalation in tension, there were no supply disruptions of any sort in the Middle East. No oil and gas production facilities or processing and exporting infrastructure was hit. All but 1% of Iran’s projectiles were taken down, while Israel achieved its objective of warning its adversary that it can penetrate air defenses and reach its nuclear development hub of Isfahan.
Secondly, non-OPEC supply – via the U.S., Canada, Brazil, Norway and Guyana – is pretty strong. Such supply additions alone are capable of meeting 2024’s demand growth all other things remaining equal.
Thirdly, courtesy of OPEC+ supply cuts of 2.2 million barrels per day (bpd) and Saudi Arabia’s long-extended lollipop, there is plenty of spare capacity in the supply system. That can, and will, likely be brought to bear in the event of a major escalation in hostilities.
Fourthly, and finally, the global demand picture remains uncertain, especially in terms of China’s crude imports, despite positive data emerging from Beijing over the last quarter. That too in a high interest rate climate and demand uncertainties elsewhere.
So where from here for the oil market, in the absence of a major escalation in hostilities or sudden dramatic spurt in demand? We’re likely to see more of the same. Brent’s price support level of $85 per barrel will hold near-term as will a six-month high resistance level of $95.
Furthermore, the market finds itself in this range not due to geopolitics but courtesy of a tight market for largely heavy sour crude due to OPEC+ production cuts and what appears to be a marginal surplus in light sweet crude courtesy of elevated U.S. production levels. We should expect more of the same in 2024.