The Middle East is in chaos, and the oil market is remarkably calm about it.
Oil prices have climbed, but not dramatically so, even as the world braces for an all-out war in the most critical region on the planet for energy.
The chill reaction in the oil market reflects a boy-who-cried-wolf mindset that has set in.
Investors, having been burned by prior geopolitical scares that quickly fizzled, have grown numb to the cascade of crises around the world. This time they’re waiting for evidence of actual supply disruptions before bidding up the price of crude oil.
Yet experts warn there is still a real risk that the emerging regional war in the Middle East could cause a devastating surge in oil prices that rocks not just the world economy but perhaps the US presidential election, too.
“This is going to get worse before it gets better. The story of the village boy who cried wolf did not end well — for the village or the boy,” said Bob McNally, president of consulting firm Rapidan Energy Partners.
“It’s hard to overstate how complacent the oil markets have become,” he said.
It’s also hard to overstate how much Americans despise price spikes at the gas pump.
Gas prices have been tumbling — with 18 states now averaging less than $3 a gallon — but a bigger conflict in the Middle East could change that.
“This is by far the world’s most important production and export region. It’s nothing less than the heart and circulation system of the global economy,” said McNally, who served as an energy adviser to former President George W. Bush.
Oil prices climbed just 2.4% on Tuesday after Iran rained hundreds of missiles onto Israel. Prices rose only slightly on Wednesday even as Israel vowed to retaliate.
At just $70 a barrel, US oil prices remain much closer to their 2024 lows than their highs last fall of nearly $90.
The subdued reaction underscores lingering concerns about a supply glut, economic trouble in China and infighting within OPEC+, the oil cartel led by Saudi Arabia and Russia.
The market response would likely have been much more dramatic two decades ago, before the shale revolution that made the United States an energy superpower.
“Pre-shale revolution, this type of situation would have sent prices well above $100,” Helima Croft, global head of commodity strategy at RBC Capital Markets, told CNN in a phone interview.
Even just two years ago, oil prices skyrocketed to $130 a barrel in March 2022 after Russia invaded Ukraine.
However, that war never caused the major supply disruptions that many feared, and oil prices eventually came back to earth.
Now the question is how Israel will choose to strike back at Iran — and whether that response will disrupt flows of oil out of the region.
It’s way too early to say there will be an energy supply disruption, and US officials will likely do everything possible to avoid one.
President Joe Biden on Wednesday said he does not support an Israeli attack on Iranian nuclear facilities.
“There is a decent risk that energy facilities and oil flows could be engulfed in an escalation between Israel and Iran and its allies,” said McNally.
And then how would Iran respond to a direct attack from Israel?
“There are only so many times you can play brinksmanship without actually tipping over into a conflict,” said Croft, a former CIA analyst.
Croft said there is a danger that Iran decides to “internationalize” the cost of the crisis by striking oil facilities in the region.
Oil prices skyrocketed in 2019 when Saudi oil facilities were damaged in an attack that US officials blamed on Iran.
“This Iranian response could be 2019 on steroids,” said Croft.
Kevin Book, managing director at ClearView Energy Partners, told CNN that he believes the oil market is underappreciating the risk in the Middle East right now.
If Israel strikes Iranian energy facilities, world oil prices would likely surge from around $74 now to $86 a barrel, ClearView told clients this week.
Even though Iran remains under sanctions over its nuclear program, it has still been able to sell its oil on the world market – mostly to China.
One risk is that Iran’s main export facility at Kharg Island gets attacked. That could have a significant impact because it accounts for 90% of Iran’s oil exports, according to ClearView.
Iran’s oil exports totaled a “robust” 1.8 million barrels per day in August, according to the International Energy Agency.
A loss of that oil would impact energy prices.
In theory, Saudi Arabia and OPEC could make up for the loss of those barrels, although it would take time to do so.
“For all the talk of the shale revolution, it’s once again going to come down to a call to Riyadh,” said Croft, the RBC analyst.
It’s also possible the Biden administration would respond to an outage by releasing emergency stockpiles from the Strategic Petroleum Reserve. Biden aggressively drained oil from the SPR after Russia invaded Ukraine, but it remains the biggest supply of emergency oil in the world.
A bigger danger is that Iran retaliates by disrupting the flow of oil out of the Strait of Hormuz, the most critical oil chokepoint on the planet.
The channel is just 21 miles wide at its narrowest point. and it’s the only way to get oil from the Persian Gulf to the world’s oceans.
A disruption in the Strait of Hormuz could send oil prices above $100 a barrel, according to ClearView.
Citigroup analysts wrote in a note to clients on Wednesday: “Any closure of the Strait of Hormuz would represent a tipping point for the global oil market and the world economy.”
“In a such a scenario, global oil markets would be in unchartered waters, with oil prices likely experiencing a sharp and significant spike well past previous record highs,” according to the note.
Citi stressed that such an event is unlikely and the price spike would be temporary as the market adapts.
Still, an oil price spike today would send gasoline prices surging, just weeks before the US election. And it could unnerve consumers and businesses about the stability of the global economy.
“There are few metrics more likely to impact voter perception of economic well-being than the price of gasoline,” said Book.
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