Iran-Israel Conflict: Rising Tensions Between Iran and Israel
As hostilities between Iran and Israel mount, the possibility of another oil crisis hangs over world markets. Due to Western sanctions against Russia and growing concerns about supply disruptions from the second-largest oil exporter in the world, the invasion of Ukraine by Russia over two and a half years ago sent oil prices skyrocketing above USD 120 per barrel. The possibility of a new battle in West Asia now faces the world, with the potential to interrupt supply from one of the world’s greatest oil-producing regions. What might happen to the price of crude oil?
Historical Oil Market Disruptions and Price Surges
Concerns of a regional conflict between Iran and Israel have grown since Hamas began attacking Israel a year ago. Both nations have worked to prevent the situation from getting worse, but recent developments have brought them closer to the edge. The stakes have increased and worries about the possible effects on the world’s energy markets have added to in response to Iran’s retaliatory missile strikes against Israel. After an almost quiet start, crude oil prices have already seen a big increase of nearly 20%, from USD65 per barrel to USD78 per barrel, and at present trading at USD75 per barrel.
When the conflict between Russia and Ukraine began, the price of crude oil rose globally to more than $100 per barrel for almost six months. Prices then began to drop precipitously as cheap Russian oil began to flow to China and India, two of the country’s biggest importers. With the Houthis and Hezbollah involved, the conflict has spread to new fronts in the Red Sea and Lebanon, one by one. As a result, West Asian security and fragile regional politics have grown even more unstable.
The Spread of Conflict: Red Sea Shipping and Oil Supply Vulnerabilities
As part of their battle against Israel, the Houthis of Yemen began striking ships allied with Israel that were traveling through the Red Sea. The Houthis then went on to attack foreign ships as well, which led to a great deal of tension in the Red Sea and forced ships sailing from Asia to Europe to take the longer route around the Cape of Good Hope.
Iran-Israel Conflict: India’s Energy Strategy Amid Global Oil Market Volatility
Iraq was India’s main oil supplier before the conflict in Ukraine, followed by Saudi Arabia and the United Arab Emirates. India took use of cheaper Russian oil to weather the shocks caused by increased crude oil prices, even in the face of US sanctions on Russia. As a matter of fact, India stayed silent on Russia’s invasion of Ukraine.
The current supply of cheap oil and the lifting of sanctions on Venezuela have aided in the saving of a more stable price environment. The oil market is less affected by such a shock than it was in 2022 as a result of the excess supply. Even though Iran produces less oil than Russia does, a disruption in its output might have a big effect on the world’s energy markets. Russia sells over 5 million barrels per day (bpd), whereas Iran exports about 2 million bpd, or around 2% of the world supply. These percentages might not seem like much, but even slight disruptions can have a heavy impact on the oil market.
The political landscape is actually influenced by the energy security issue, as US presidential contenders are well aware. Election results could be significantly impacted by the possibility of a large spike in oil prices.
Iran has previously been the target of military threats from Israel. Prime Minister Benjamin Netanyahu gave the Israeli military orders to get ready to strike Iran in 2010 and 2011. Even so, the military hierarchy argued the legitimacy of the directives in both instances, given that they were issued without the required cabinet approval. In the end, their intentions were put off. The political environment now seems more favorable to taking strong measures against Iran. Even more hawkish than he is, Prime Minister Netanyahu’s cabinet is unlikely to provide any resistance.
In addition, the military leadership in Israel is no longer as averse to this kind of action as they at one time were. A military confrontation seems more likely now that tensions with Iran are rising and Israel’s political situation is becoming more unstable. The world community is keeping a careful eye on the situation in the hopes of limiting a tragic escalation that may have far-reaching effects on the area and beyond.
Iran’s principal ports, mainly the oil terminals that are key to the nation’s economy, are among its most susceptible vital objectives. Since these terminals provide a sizable amount of Iran’s foreign exchange earnings, Israeli military strategists find them to be an alluring target. In accord with Israeli planners, attacking these oil terminals might seriously harm Iran’s now unstable economy. An assault of this kind may acutely impair the nation’s capacity to export oil, which is a crucial source of income, and further distance it from the rest of the world.
Military analysts feel that without close working together with its main ally, the United States, Israel cannot afford to begin a significant military assault against Iran. The Biden administration, however, has openly opposed an Israeli attack on Iran’s oil infrastructure, citing worries about the possible effects on energy prices around the world, notably in light of the coming presidential election in the United States.
The Israeli military is concerned that combating both Hezbollah in southern Lebanon and Hamas in Gaza and Iran together could strain their limited resources to the breaking point. The advances Israel has made in previous confrontations could be at risk, according to some military officials.
After Russia attacked Ukraine in 2022, the world oil market experienced a vivid shift. At that time, economies were going up from COVID-19 lockdowns, and oil prices spiked, driving up demand beyond supply. Though, things are very different now.
Iran-Israel Conflict: OPEC’s Response to Changing Market Conditions
The Organization of the Petroleum Exporting Countries (OPEC) and its allies tried to keep prices high by lowering production, but quota-cheating inside the organization has caused a change in tactics. Because of this, OPEC+ has decided to give up on trying to limit production and will instead raise output in December.
Even Saudi Arabia, which has been frantically attempting to raise oil prices to finance its large-scale domestic spending plans, is suddenly yielding. According to reports, the monarchy has dropped its pricing target of USD 100 per barrel, showing a readiness to give market share precedence over revenue maximization.
Iran-Israel Conflict: Future of Global Oil Prices in an Oversupplied Market
The global oil market is expected to get even more oversupplied, with Saudi Arabia giving a sign of a change in its approach and OPEC+ preparing to expand production. This might drive prices lower and weaken the cartel’s power even further. Further, oil production has expanded dramatically in recent years in nations like Guyana, Canada, and Brazil. The International Energy Agency projects that non-OPEC countries’ output will increase by 1.5 million barrels per day in 2019, underscoring the waning power of conventional oil-producing countries.
The current glut of oil reserves offers some hedge against geopolitical shocks, but disruptions to the global oil market are still possible. India and other nations that depend on imported crude have benefited from the relatively stable prices that have been maintained by the oil glut. Oil prices might stay largely steady as long as supply keeps up with demand.