THE ISRAEL-IRAN CONFLICT HIGHLIGHTS THE MIDDLE EAST'S DIMINISHING INFLUENCE ON OIL PRICES

The muted oil price reaction to the recent Israel-Iran conflict indicates that the influence of Middle Eastern politics on the energy market is waning, driven by shifts in global supply dynamics.

 

 

The Israel-Iran Conflict's Impact on Oil Prices

 

 

The subdued volatility in oil prices during the Israel-Iran conflict has underscored the increasing efficiency of global energy markets and the structural shifts in crude supply, signaling that Middle Eastern politics may no longer dominate oil markets as they once did.

 

The spike in oil prices following Israel's surprise attack on Iran was notable but relatively modest considering the high risks typically associated with conflicts between rivals in the Middle East.

 

Benchmark Brent crude, often seen as a geopolitical risk barometer, rose from under $70 per barrel on June 12—one day before Israel's initial strike—to a peak of $81.40 on June 23 after U.S. airstrikes on Iranian nuclear facilities.

 

However, prices dropped sharply the same day once it became clear that Iran’s retaliation against Washington—a pre-announced strike on a U.S. military base in Qatar that caused limited damage—was essentially a de-escalation. Prices later fell below pre-conflict levels, reaching $67 on Tuesday, after U.S. President Donald Trump announced that Israel and Iran had agreed to a ceasefire.

 

The worst-case scenario for energy markets—an Iranian blockade of the Strait of Hormuz, through which nearly 20% of the world’s oil and gas supply flows—did not materialize. In fact, there was virtually no disruption to Middle Eastern energy flows during the entire conflict. For now, markets appear to have been justified in not panicking.

 

Risk Premiums Are Shrinking

The relatively narrow 15% price swing during the conflict suggests that oil traders and investors have significantly reduced the geopolitical risk premium traditionally associated with Middle Eastern tensions. Consider the market reactions to past regional crises: the 1973 Arab oil embargo nearly quadrupled oil prices. The disruption of Iranian oil production following the 1979 revolution doubled spot prices.

 

Iraq’s invasion of Kuwait in August 1990 sent Brent crude prices soaring to $40 per barrel by mid-October—double the previous rate. The outbreak of the second Gulf War in 2003 pushed prices up by 46%. Although most of those supply disruptions—aside from the embargo—were relatively short-lived, markets reacted intensely.

 

Of course, comparisons between conflicts should be approached with caution, as each has unique characteristics. Still, the percentage-based market reaction to major Middle East supply shocks has clearly diminished over the past few decades.

 

Rationality and Real-Time Intelligence

 

Several factors help explain this shift in the perceived value of Middle East risk premiums. First, markets may have simply become more rational, thanks to better access to data, news, and technology. Investors now have real-time visibility into global energy conditions. With satellite tracking of vessels and aerial imagery of oilfields, ports, and refineries, traders can monitor production and logistics more accurately than ever before—giving them a clearer picture of global supply and demand balances.

 

In this latest conflict, markets responded rationally. Supply disruption risks rose, and so did prices—but not excessively—due to widespread skepticism over Iran’s willingness or capacity to significantly disrupt maritime flows over the long term.

 

Another explanation for the relatively muted price movement is that regional producers—acting with equal pragmatism—have learned from past crises and proactively built alternative export routes and storage infrastructure to cushion against potential disruptions in the Gulf.

 

Saudi Arabia, the world’s top oil exporter, produces about 9 million barrels per day (nearly 10% of global demand) and operates a crude oil pipeline from its Gulf coast to the port city of Yanbu on the Red Sea. That line has a capacity of 5 million barrels per day and could be expanded by another 2 million if needed.

 

Meanwhile, the United Arab Emirates, another major OPEC producer with daily output around 3.3 million barrels, has a 1.5 million bpd pipeline connecting its onshore fields to the Port of Fujairah, located east of the Strait of Hormuz. Both countries, along with Kuwait and Iran, also maintain large storage facilities in Asia and Europe, enabling them to continue supplying customers even amid short-term disruptions.

 

Shifting Fundamentals

 

Perhaps the most important reason for the world’s declining anxiety over Middle Eastern supply risks is simply that the region accounts for a shrinking share of global energy output.

 

In recent decades, oil production has surged in new basins across the U.S., Brazil, Guyana, Canada, and even China.

 

According to the International Energy Agency (IEA), OPEC’s share of global oil supply has fallen from over 50% in the 1970s to 37% in 2010, and further down to 33% in 2023—largely due to the U.S. shale oil boom in the world’s largest energy-consuming nation.

 

Indeed, the global oil market was well-supplied heading into the recent conflict, which helped ease concerns.

 

Ultimately, the Israel-Iran conflict serves as further evidence that the historic linkage between Middle Eastern politics and energy prices has loosened—perhaps permanently. So while geopolitical risks may continue to rise, don’t expect oil prices to follow the same trajectory they once did.

 

Source: Ron Bousso; Editing by Toby Chopra / Reuters / BairdMaritime

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