The threat of a return to $100-a-barrel (€85 per barrel) oil, last seen in the wake of Russia’s invasion of Ukraine, loomed large in recent weeks as Israel and Iran traded missile attacks.
This matters because, while oil’s share of global energy demand fell below 30 per cent for the first time ever last year, 50 years after it peaked at 48 per cent, the black stuff and gas still account for more than half of the energy mix, according to International Energy Agency (IEA) statistics.
Goldman Sachs, which had previously been forecasting that Brent crude would average $60 this year, warned earlier this week that it could reach $110 if Iran moved to close the Strait of Hormuz, a narrow shipping lane in the Gulf through which 20 per cent of global oil and gas supplies are moved, after US president Donald Trump entered the conflict on Saturday by ordering strikes on three Iranian nuclear sites.
By the time Goldman had issued its alert, crude prices had been past their recent peak above $79 – having surged 14 per cent in less than two weeks – and have subsequently fallen back to about $68 following a ceasefire.
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That is below where they were before Israel launched its offensive on Iran on June 13th.
[ Oil prices expected to jump after US attacks on IranOpens in new window ]
“The markets are pricing in that the worst of the Iran-Israel conflict is behind us and that the conflict will avoid any oil supply shocks, which is why oil prices have retraced to levels they were at prior to the outbreak of the hostilities,” said Carol Schleif, chief market strategist with BMO Private Wealth in the US.
The recent conflict has highlighted, too, how much less dependent the world is on the Middle East for supply than in decades past – something that is well known among oil traders.
The US was the biggest producer of oil last year, having overtaken Saudi Arabia in 2018. Russia is number three, mainly supplying China and India these days as a result of western sanctions, followed by China and Canada.
The effect of geopolitical tensions in the Middle East has also eased over time, too. Reuters noted that the scale of the recent spike pales in comparison to the near quadrupling of oil prices during the 1973 Arab oil embargo, the doubling of prices as a result of both the 1979 Iranian revolution and Iraq’s invasion of Kuwait in 1990, and a 46 per cent surge during the second Gulf War.
With the fragile Israel-Iran ceasefire appearing to hold, for now at least, the market’s attention has returned to the other side of the equation: demand.
The outlook for this has been weakening of late amid Trump’s tariff tiffs.
Earlier this month, the World Bank downgraded its global growth forecasts for this year and next to 2.3 per cent and 2.6 per cent, respectively – warning that we are facing the slowest decade for global growth since the 1960s as the effect of Trump’s tariffs are felt.
Crude oil prices are more than 9 per cent lower than where they were before Trump’s April 2nd tariffs speech.
Ipek Ozkardeskaya, an analyst with Swissquote Bank, reckons bearish investors will soon test to see if oil can fall below $65 a barrel. “A break below this level could signal a return to the negative trend that has been building since the start of the year,” she said.
