24 April 2024
As the tension continues to mount in the Middle East, with Israel launching what many view a token gesture attack on Iran, the oil price has remained surprisingly constant. In the past, even the slightest hint of conflict in the Middle East pushed prices well beyond $100 a barrel.
The price of Brent crude recently dipped below the $90 level in the aftermath of the attack on Israel, but there is still concern.
Upon news that Iran was launching an attack on Israel, all eyes switched to the oil market with expectations of a significant spike. This didn't occur, but insiders believe that market anticipation and prior pricing of potential conflict had already seen the price move before the attack was announced (remember the US warning before the Iran drone attack).
Interestingly, at a time when OPEC has been trying to reduce production levels (a policy since November 2022), you'd have thought this would have placed more upward pressure on the price of oil. The fact that this failed to materialise suggests an underlying opinion that further major conflict in the Middle East may not be inevitable.
Even though the oil price is relatively stable at this moment, there is still potential for short-term price spikes if tensions increase across the region. Israel's ongoing conflict with Palestine and what many see as unfinished business with Iran has placed this situation on a knife edge. A significant escalation of tension could disrupt supply routes and even lead to more speculative trading among investors.
Only when you dig a little deeper do you begin to realise the mutual dependence of oil exporters and oil importers. While nobody is suggesting that the tensions are yet over, this mutual dependency could help avoid significant conflict and disruptions. For example, an article in the FT highlighted China's dependence on Iranian oil shipments, which would be disrupted in the event of further aggression.
While the US presidential elections are grabbing the headlines, as are numerous court cases involving Donald Trump, in 2024, more than half of the world's population will go to the polls. Just as the US authorities were reluctant to encourage Israel to respond to Iran and have recently been more balanced in their approach to Gaza, this is unlikely to change as polling day gets ever closer.
That said, the US did recently impose new oil and gas sanctions on Venezuela, but this seems to be related to a failed commitment to hold a free and fair presidential election.
Since the US mortgage crisis of 2008, which led to a worldwide financial depression, economies have faced many challenges. It is important not to underestimate the influence the price of oil has on economies and, most importantly, inflation. When considering the battles that central banks have wagered to control inflation, stirring tensions in the Middle East would be counterproductive for economies. It also wouldn't go down well with voters!
It's also important to recognise the impact that the oil price has on trade balances, currency valuations, sector investment, government budgets, and overall stock market sentiment. That said, whether the US will be as reluctant to flex its muscles after the presidential election remains to be seen.
On the surface, the price of oil has moved little despite the recent increase in tensions in the Middle East. Looking back, it would appear that markets prepared themselves for a degree of friction and adjusted the price of oil accordingly - prior to the headline military activity.
While nothing can ever be ruled out regarding geopolitical tensions, more conflict and the potential detrimental impact on inflation would not go down well with the electorate. Whether this changes after the US and UK elections remains to be seen, but there appears to be little appetite for much more than sabre-rattling at this moment in time.
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