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Why oil prices remain steady even as Middle East tensions escalate

Good morning, and welcome back to Energy Source, coming to you from New York.

The US reimposed sanctions on oil and gas from Venezuela yesterday after finding President Nicolás Maduro’s revolutionary socialist government had “fallen short” of its commitments to hold a free and fair presidential election. The sanctions come at an uncertain time for the oil market and the White House as it vies to keep a lid on prices in an election year. More from our Latin America correspondents Michael Stott and Joe Daniels here.

Washington and the EU are also preparing new sanctions on Iran in response to its missile and drone attack on Israel over the weekend and as part of their efforts to prevent a forceful retaliation from Israel.

Curbing exports from Tehran will be difficult: the country is exporting more oil than at any time in six years, our energy editor Malcolm Moore reports.

Today’s newsletter looks at the forces driving the oil market. Prices have remained relatively steady this week as the world waits with bated breath over how Israel will respond to Iran’s attack over the weekend.

Thanks for reading,


What’s keeping oil prices steady as Middle East tensions escalate?

All eyes are on the oil market as traders anxiously await Israel’s response to Iran’s attack over the weekend.

Price moves for Brent crude, the international benchmark, have been muted, dipping below $90 a barrel following Tehran’s strike on Saturday. The subdued reaction to the historic attack stems from investors pricing in the risk prior to the event.

This reflects a larger trend of market quietness since the start of the Israel-Hamas war. While oil prices have steadily marched up 15 per cent since the start of the year, they have broadly stayed rangebound and disruptions to supply have been minimal.

“The oil market is waiting,” said Daniel Yergin, author and vice-chair of S&P Global. “Both Iran and Israel say this is the new equation, and what’s happening now is figuring out what does that add up to in the oil market?”

Robert Ryan, chief strategist at BCA Research, said the “larger impact” on oil prices has been price fundamentals as demand remains strong and artificial production cuts from Opec+ buoy prices. BCA expects Brent crude to average $98 a barrel this year, with average prices exceeding $100 a barrel in the second half of 2024.

This stability could rapidly change. The rise in conflict between Iran and Israel and the continued war in Ukraine have spurred some analysts to revise their price forecasts this week. Some firms are warning triple-digit oil prices are well within in reach depending on Israel’s choice of retaliation and US pressure on Iran.

Line chart of  showing Brent crude prices have steadily climbed

“We’ve changed our mind,” said Henning Gloystein, head of energy, climate and resources at Eurasia Group, which now expects prices to average more than $90 a barrel in the second quarter, up from the $70-$90 price range estimated in January. “Prices could quite easily hit $100 [a barrel] if things in the Middle East get worse.”

How Israel responds is the big wild card. While a full-scale war could erupt between the Jewish state and Iran, analysts expect a forceful retaliation from Israel triggering major disruptions to oil supply is unlikely as it faces international pressure to avoid further escalation. Many groups, including JPMorgan Chase and Société Générale, expect oil prices to hover around $90 in their base cases.

The threat of Iran disrupting oil flows through the Strait of Hormuz, where roughly 20 per cent of the world’s seaborne oil passes through, is also unlikely given Iran also uses this channel to ship crude to its biggest customer: China.

“Even further escalation in the conflict may not necessarily lead to supply disruptions,” said Kim Fustier, head of European oil and gas research at HSBC, which has maintained its Brent forecast of $82.50 a barrel for this year. “I have trouble believing that things would escalate to the point where Hormuz becomes a problem for global oil and [liquefied natural gas] flows.”

Another force in the market is Opec+. The cartel has installed production cuts since November 2022 to artificially buoy oil prices. Analysts estimate Opec+ has about 6mn b/d of spare capacity it can unleash on to global markets to lower prices if they spike into the triple digits to prevent demand destruction.

“There’s a big emergency mechanism in the oil markets to calm things down in case things escalate,” said Jorge León, senior vice-president at Rystad Energy, which expects minimal escalation from Israel as the most likely scenario.

Column chart of Estimated spare crude capacity (mb/d) showing Opec+ has lots of excess crude

Lastly, the desire to keep inflation under control and lower interest rates is giving countries a strong incentive to keep oil supplies flowing. While the Joe Biden administration is considering tougher sanctions on Iran, analysts doubt the White House would curb oil flows in an election year or whether measures targeting Iranian oil flows would be easily enforced.

“The administration is unlikely to change their stance on oil sanctions . . . just due to the election season coming up and higher oil prices already,” said Hunter Kornfeind, oil market analyst at Rapidan Energy, which expects Brent to hover slightly above $90 for the rest of the year. “They will do what is necessary to keep gasoline prices from rising.”

While the rationale is there to keep oil flowing, tensions are high in the Middle East and a miscalculation could send prices surging.

“The political logic is there but sometimes in conflict logic doesn’t really mean much,” León said. “Things can go south very, very quickly.”

Job moves

  • Shell’s former chief executive Ben van Beurden is joining private equity group KKR as senior adviser for energy transition investments. Van Beurden spent 39 years at the oil major.

  • Daniel Berenbaum joins US fuel cell company Bloom Energy as chief financial officer, succeeding Greg Cameron. Berenbaum previously served as CFO of National Instruments.

  • Origin Energy, an Australia-based electricity provider, appointed Tony Lucas as chief financial officer, following the retirement of Lawrie Tremaine. Lucas previously served as the executive general manager of the company.

  • Lightshift Energy, a US energy storage provider, appointed Robert Greskowiak as chief commercial officer. Greskowiak joins from Invenergy, where he served as vice-president of origination.

Power Points

Energy Source is written and edited by Jamie Smyth, Myles McCormick, Amanda Chu and Tom Wilson, with support from the FT’s global team of reporters. Reach us at energy.source@ft.com and follow us on X at @FTEnergy. Catch up on past editions of the newsletter here.

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