OIL Middle-East War Premium ?
Calling all the energy/oil monkeys to shed some light on the recent developments in the Middle-East. Can someone please explain how we don't see oil shooting higher up with the recent escalation? Is it the weaker demand in China the main factor counter-balancing?
Many thanks
Hey there! So, you're curious about the oil markets and the Middle East situation, huh? Let's peel this banana bit by bit.
First off, the Middle East is like the VIP room of the global oil club. What happens there can really shake up the market. But here's the twist: even with tensions running high, oil prices aren't always going to skyrocket. It's a bit like expecting a banana to turn yellow overnight – sometimes it just takes time, or it might not happen the way you think.
Now, let's talk about China. The Middle Kingdom is a heavyweight consumer of oil, and when they're not feeling so thirsty for the black gold due to weaker demand, it's like a giant counterweight that can keep prices from ballooning.
But wait, there's more! You've got to consider other players like the IEA and OPEC, who are like the referees in this high-stakes game. They've got their hands on the levers of oil supply, and they're not afraid to use them. Plus, global oil supplies were already tight before any skirmish started shaking things up.
So, to sum it up: Yes, Middle East tensions can add a war premium to oil prices, but it's a cocktail mixed with other factors like China's demand, OPEC's moves, and global supply conditions. It's a delicate balance, and sometimes one ingredient can mellow out the others.
Keep your eyes peeled, and don't slip on any market peels! If you need more insights, just swing back to the jungle, and I'll be here to help.
Sources: Macro Monday: The Middle East, Oil Back to $100?, Energized Conflicts | The Daily Peel | 2/14/22, Break The Pumps | The Daily Peel | 3/24/22, 3 Reasons Canadians Aren’t Seeing Lower Pump Prices
Any human oil/energy monkey around ?
Neither Israel nor Palestine are players in the oil business so there’s no supply chain shock. The tankers being targeted by Yeminis are Israel bound cargo ships, and Israel gets its oil (at least partly) from places like ISIS controlled areas of Iraq via pipelines from Turkey. Iran continues to sell its oil to China, India, etc so no change there either. Qatar has renewed its lease for hosting American military presence for another decade and there’s no material change at this time further north in Ukraine. For everyone else in the region it’s business as usual: even if the conflict and the politics around it are different this time it’s not yet clear where the chips will fall and many large players are defaulting to the assumption this whole thing will blow over soon (they are mistaken, but that’s another conversation entirely).
The Saudis have started making RMB denominated oil deals with China so while de-dollarization continues there’s no impact to oil supplies.
Thus no change in price.
What WOULD move the needle was if there were some breakthrough with the oil off the coast of Gaza….which, in case you are deluded by propaganda, is what the current “war” is about.
Is the security of the Eilat-Ashkelon pipelines/adjacent pipelines in the mediterranean something to consider for traders, or do the transportation alternatives/redundancies cancel out any impact (+/-) that would’ve otherwise mattered, particularly for Americans?
I would ask: who would be a threat to those pipelines? Lebanon doesn’t want to escalate the situation, Gaza is being razed to the ground, and the Yemenis are on the other side of the Suez Canal. It’s possible Israel sabotages the pipelines as a pretense to escalate the situation and try to draw the US into the conflict (they do this all the time) but they don’t need a domestic oil shortage at the moment.
That's really helpful, thank you very much. I guess the Gaza oil/gas would increase supply on the market therefore having a downward pressure on price.
But what would trigger an upward pressure on price given the current situation?
Many thanks.
Production cuts could raise prices but this is unlikely as Arabia announced production increases given weaker Asian demand.
If the Israeli centered conflict continues to escalate that could also lead to supply shocks. The US has recalled an aircraft carrier and increased diplomacy in the area, so while the odds of this are low they are not beyond imagination.
If the US were to force a two state settlement and end the Israeli occupation of Palestinian territory, it would be richly rewarded with more favorable oil prices and by default also allow for decreased military spending which would lead to tax cuts, which are just as good. However, this is highly improbable due to entrenched influence on congress by interests such as the israel lobby that talks mightily about peace but is really after a regional empire (google “greater israel” if you doubt this), the usual defense contractor corruption of military planning, and American oil companies who enjoy fatter margins when overseas oil prices are higher.
IMO not much is likely to change for now and we are probably looking at stability for a while with any big spikes being event driven.
These observations come from analysis done from a geopolitical and defense perspective and not a power/commods trading perspective….so you may wish to further discuss with actual oil traders.
That's really helpful. Many thanks
Pretty simple as others have noted-
1.) there is no physical production disruption currently
2.) the bar for sustained physical disruption is high- see 2019 Abqaiq attack on Saudi (previously a tail risk) that was resolved in a few weeks; even Russia-Ukraine did not end up being a massive physically disruption (though the market traded the risk of it for sure)
3.) if there were a physical disruption there is currently potentially ~6.5 mbpd of spare capacity in a ~100 mbpd (million barrel a day market)...i.e. oil that is profitable to produce but is not produced for policy reasons (to support oil prices), a more "normal rate" is ~3.5 mbpd; and this is highly simplified but an unexpected return of ~3 mbpd could be worth ~$40 downside to the oil price (the intuition being if there were some outages this could offset it with some lag)
4.) the market moving event would be a war with Iran and Strait of Hormuz closure because that likely would cause production shut ins as exports blocked and storage fills (not enough alternate export routes), but that would cause major disruptions to China so perhaps not in many players best interests
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