Monday, December 30, 2024

Middle East conflict: Why oil prices are not surging ahead

Must read

Israel is fighting on at least four fronts, threatening a war across the oil-rich Middle East, but there is no great sense of fear yet as far as financial markets are concerned.

Israel’s actions against Hamas in Gaza, Hezbollah in Lebanon, the Houthis in Yemen and the ultimate sponsors of these groups, Iran, have proved a catalyst for oil price spikes since the 7 October attack on Israel in 2023.

But something has changed in recent weeks – even as the conflict has intensified.

Oil prices have barely moved and remain well below the levels seen in April when Iran last fired on Israel in retaliation for military action against its proxies.

Money latest: Different ways you can beat inheritance tax

Where are prices today?

The cost of Brent crude stands at $75 a barrel on Wednesday morning.

That is up from the $71 figure seen 24 hours earlier, before Iran’s missile barrage on Israel.

So we have seen a shift, yes, but market analysts say there are many factors holding the price back.

How does the cost compare to recent price shocks?

This chart tells the story.

It shows the settling for prices since the price shock of 2022 after the Russian invasion of Ukraine.

Brent peaked above $122 in May of that year as the market juggled the impact of Western sanctions against the Kremlin, among other factors.

The price gradually fell back from there until worries about low stockpiles in September 2023 pushed it towards $100 again – remaining sticky from there due to the cross-border attack by Hamas a fortnight later.

Brent stood at $90 this April after Iran’s first rocket attack on Israel.

But that was largely seen as a mere warning shot using inferior weaponry – more a face-saving exercise than a real attempt to cause destruction.

So, perhaps, that makes today’s oil price even more puzzling given the escalation since.

Please use Chrome browser for a more accessible video player

Explosions in Beirut as Iran targets Israel

What is supporting the oil price?

The theory that Israel may choose to target Iran’s oil infrastructure is a risk.

The country exports an estimated 1.5 million barrels per day but it is not among the major players due to the impact of US sanctions so any disruption to its supplies would be minimal.

Also being priced in is the possibility of wider risks to shipments in the event of a more regional conflict.

In addition to the Middle East crisis, the price has also been propped up by news late last month of economic stimulus in China.

Please use Chrome browser for a more accessible video player

‘We’re on brink of broader war’

So what is keeping prices down?

Basically, the global economic outlook has taken a turn for the worse. It’s still tough out there.

The global economy is being weighed down by the effects of the successive shocks that have hit since COVID, with higher costs deterring expansion.

Whether that malaise is the result of higher central bank interest rates to battle inflation or reluctance among governments to add to COVID-era borrowing, the outlook for immediate oil demand remains poor.

As Western economies slow again, the biggest growth market of China has been in the doldrums for years due to the effects of a property crisis that has hammered consumer spending.

Also providing a low gear is the continued expectation that the cartel of oil-producing countries, known as OPEC, will raise output in December.

Read more from Sky News:
Post Office execs ‘dragged their feet’ on compensation
Fears US hurricane has disrupted supply of critical material

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said of the price situation: “These worries are being mitigated by expectations that Saudi Arabia will turn on the taps more fully, and lower demand from China, but upwards pressure is likely to continue while uncertainty reigns about just how far conflict will spread.”

What is the outlook for fuel prices?

Higher oil prices tend to stoke costs more widely in the economy, as they feed through, due to the commodity’s importance in many areas from transport to manufacturing.

It generally takes a couple of weeks for oil price shifts to be reflected in factory gate costs and at the fuel pumps.

In the case of petrol and diesel, prices are currently at a three-year low. Any sustained increase for Brent crude may mean that is short lived.

Latest article