Oil prices are expected to rise following Iran's attack on Israel, with the future fate of oil prices dependent on the response of Israel and its allies. About this the Bloomberg.
Worries over Iran's response to last week's attack on its embassy in Damascus reportedly helped lift global Brent crude prices to $92,18 a barrel, the highest since October 2023.
On Friday, the price rose 71 cents to $90,45 a barrel, while US West Texas Intermediate crude futures rose 64 cents to $85,66 a barrel.
"It is reasonable to expect higher prices when trading resumes, however, so far there has been no impact on production and Iran has said that 'the matter can be considered closed'"
No matter how fierce and painful the first reaction of the market may be, the rally may be short-lived if the supply from the region is not significantly disrupted," said PVM oil broker Tamas Varga.
The Biden administration says it is not encouraging Iran to increase exports and is tightening sanctions.
A decline in Iranian exports will lead to further increases in oil prices and the cost of gasoline in the United States, which is a politically sensitive issue ahead of the election.
The closing of the Strait of Hormuz, through which ⅕ of the world's oil exports passes, may also affect the price increase.
On Tuesday, April 9, the commander of the naval forces of Iran's Revolutionary Guard said that Tehran can close the strait if it deems it necessary.
In general, the situation in the world energy market is unstable, and for the oil market everything depends on Israel's response and the likelihood of an escalation cycle. Bloomberg made several preliminary conclusions:
1) From a purely physical point of view, nothing has changed in the world of oil. Middle Eastern oil flows unimpeded into the global economy, and the Strait of Hormuz, the world's most important energy hub, remains open to shipping. Simply put: there is no shortage of oil.
2) Iran appears to have aimed to escalate for the sake of de-escalation, not to open the first chapter of a regional war. Long before the drones and missiles reached Israel, Tehran said the attack was a one-off "legitimate defense" after Israel bombed its embassy in Syria: "The matter can be considered closed."
3) Geopolitics aside, oil supply and demand fundamentals look healthy. Even the most bearish forecast for oil demand suggests that consumption growth in 2024 will match the historical annual average of 1,2 million barrels per day. Bullish forecasts are for a much larger increase in the range of 1,5 to 1,9 million barrels per day. On the supply side, a series of disruptions has reduced production this year, particularly for US shale oil. As a result, global oil inventories, which usually increase in the first half of the year, remained unchanged. If OPEC+ does not increase production in the near future, reserves will decrease in the second half of the year.
4) OPEC+ keeps the market tense. Even though oil prices are well above $80, in late March they decided to postpone the first quarter output cuts to the second quarter. The next meeting is scheduled for June 1. In its latest monthly oil report on April 11, the cartel noted that "the stable oil demand forecast for the summer calls for close monitoring of the market."
5) Unless Israel and Iran engage in mutual attacks that would cut off oil flows, OPEC+ has more than enough spare production capacity to keep prices in check. Saudi Arabia, the United Arab Emirates and Iraq put on the market about 5 million barrels per day, which is equal to about 5% of global demand and more than Iran itself produces.
6) Barring a regional war, the biggest risk to oil supplies is political. President Joe Biden promised a "diplomatic" response to Iran's attacks. Since his inauguration in 2021, Biden has effectively allowed Iran to increase oil production by easing US sanctions on Tehran.
In March, Iran's oil output reached a five-year high of 3,25 million barrels per day, up from 2,1 million in January 2021. If Biden reimposes sanctions, it could significantly strengthen the market unless OPEC+ offsets the impact.
7) Thanks to a tight oil market, Moscow is already selling its crude at $75 a barrel, well above the G60 limit of $XNUMX a barrel. If Washington imposes sanctions on Iran, it could create room for Russia's own sanctions barrels to gain market share and drive even higher prices. One of the reasons the White House turned a blind eye to Iran's oil exports is that its priority was to hurt Russia.
8) The risk that the White House will use the country's strategic oil reserves later this year has increased significantly. Even if half of what it was a decade ago, reserves of about 365 million barrels are still a huge strength. Biden may use the cover of rising tensions in the Middle East to justify its use and try to drive oil prices down to $80 a barrel.
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