Why the skirmish between Israel and Iran failed to lift oil prices above their highest level in six months

As the dust settles on the latest geopolitical flare-up in the Middle East, global crude oil prices have largely remained where they were before it occurred – at six-month highs, but well below the psychological price of three numbers above that. $100 a barrel, which some predicted would rise.

For context, tensions escalated on April 1, 2024 when an alleged Israeli attack in Damascus, Syria killed 13 people, including two Iranian generals and five officers, and demolished part of the Iranian consulate in Syria.

Among the dead was Brigadier General Mohammad Reza Zahedi, a senior commander of the elite overseas unit of Iran’s Islamic Revolutionary Guard Corps – the Quds Force – in Syria and Lebanon, believed to have ties to the terrorist group Hamas with whom Israel has been in conflict since October. there is war. 7, 2023.

It followed a first-ever retaliatory strike by Iran on Israeli territory on April 13 with some 300 drones and ballistic missiles. Most of these were shot by the Israeli army in cooperation with the US, Britain, Jordan and other allies.

Despite calls for restraint, the Israelis then on Friday (April 19, 2024) launched their own alleged counterattack on Iran’s central Isfahan province, home to Tehran’s controversial nuclear program. For the time being, both the region and the oil market can breathe a sigh of relief.

That’s because the Israeli action appears to be limited in scope and intended to cause a warning rather than material damage. Furthermore, the material damage that occurred, as observed through satellite imagery, was downplayed by Iran. According to official statements, no lives were lost on either side.

Then on Friday, the price of Brent crude fell to around $87.20 per barrel, well down from the intraday high of $92 per barrel on April 12. Granted, Friday’s closing price is still near the highest level since October 2023. But it’s also a significant drop. a mitigation that can seem completely out of sync with a serious and unprecedented escalation. There are several reasons for this.

First, despite a dangerous escalation of tensions, there were no supply disruptions in the Middle East. No oil and gas production facilities or processing and export infrastructure were affected. All but 1% of Iranian projectiles were shot down, while Israel achieved its goal of warning its adversary that it can penetrate air defenses and reach its nuclear development center Isfahan.

Second, the supply from non-OPEC countries – via the US, Canada, Brazil, Norway and Guyana – is quite large. Such supply expansions alone are capable of meeting demand growth in 2024, other things being equal.

Third, thanks to OPEC+’s 2.2 million barrels per day (bpd) supply constraints and Saudi Arabia’s long-standing lollipop, there is plenty of spare capacity in the supply system. That could and probably will apply in the event of a major escalation of hostilities.

Fourth and finally, the global demand picture remains uncertain, especially when it comes to Chinese crude oil imports, despite positive figures from Beijing last quarter. This also in an environment of high interest rates and demand uncertainties elsewhere.

So where will the oil market come from, short of a major escalation of hostilities or a sudden dramatic increase in demand? We’ll probably see more of the same. Brent’s price support level of $85 per barrel will hold in the near term, as will the six-month high resistance level of $95.

Furthermore, the market is in this range not because of geopolitics, but thanks to 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 thanks to higher production levels in the US. We can expect more of the same in 2024.