LONDON — The contained move in oil prices during the Israel-Iran war highlights the increasing efficiency of energy markets and fundamental changes to global crude supply, suggesting that Middle East politics will no longer be the dominant force in oil markets they once were.
The jump in oil prices following Israel’s surprise attack on Iran was meaningful but relatively modest considering the high stakes involved in the conflict between the Middle East rivals.
Benchmark Brent crude prices, often considered a gauge for geopolitical risk, rose from below $70 a barrel on June 12, the day before Israel’s initial attack, to a peak of $81.40 on June 23 following the US strikes on Iranian nuclear facilities.
Prices, however, dropped sharply that same day after it became clear Iran’s retaliation against Washington — a well-telegraphed attack on a US military base in Qatar that caused limited damage — was essentially an act of de-escalation. Prices then fell to below pre-war levels at $67 on Tuesday after US President Donald Trump announced that Israel and Iran had agreed to a ceasefire.
The doomsday scenario for energy markets — Iran blocking the Strait of Hormuz, through which nearly 20% of the world’s oil and gas supplies pass — did not occur. In fact, there was almost no disruption to flows out of the Middle East throughout the duration of the conflict.
So, for the time being, it looks like markets were right not to panic.
The moderate 15% low-to-high swing during this conflict suggests oil traders and investors have slashed the risk premium for geopolitical tensions in the Middle East.
Consider the impact on prices of previous tensions in the region. The 1973 Arab oil embargo led to a near quadrupling of oil prices. Disruption to Iranian oil output following the 1979 revolution led to a doubling of spot prices. Iraq’s invasion of neighboring Kuwait in August 1990 caused the price of Brent crude to double to $40 a barrel by mid-October. And the start of the second Gulf war in 2003 led to a 46% surge in prices.
While many of these supply disruptions — with the exception of the oil embargo — ended up being brief, markets reacted violently.
One, of course, needs to be careful when comparing conflicts because each is unique, but the oil market’s response to major disruptions in the Middle East has — in percentage terms, at least — progressively diminished in recent decades.
There are multiple potential explanations for this change in the perceived value of the Middle East risk premium.
First, markets may simply be more rational than in the past given access to better news, data and technology.
Investors have become extremely savvy in keeping tabs on near-live energy market conditions. Using satellite ship tracking and aerial images of oilfields, ports and refineries, traders can monitor oil and gas production and transportation, enabling them to better understand supply and demand balances than was possible in previous decades.
In this latest conflict, markets certainly responded rationally.
The risk of a supply disruption increased, so prices did as well, but not excessively because there were significant doubts about Iran’s actual ability or willingness to disrupt maritime activity over a long period of time.
Another explanation for the limited price moves could be that producers in the region — again, rational actors — learned from previous conflicts and responded in kind by building alternative export routes and storage to limit the impact of any disruption in the Gulf.
Saudi Arabia, the world’s top oil exporter, producing around 9 million bpd, nearly a tenth of global demand, now has a crude pipeline running from the Gulf coast to the Red Sea port city of Yanbu in the west, which would have allowed it to bypass the Strait of Hormuz. The pipeline has capacity of 5 million bpd and could probably be expanded by another 2 million bpd.
Additionally, the United Arab Emirates, another major OPEC and regional producer, with output of around 3.3 million bpd of crude, has a 1.5 million bpd pipeline linking its onshore oilfields to the Fujairah oil terminal that is east of the Strait of Hormuz.
Both countries, as well as Kuwait and Iran, also have significant storage facilities in Asia and Europe that would allow them to continue supplying customers even through brief disruptions.
Perhaps the most important reason for the world’s diminishing concern over Mideast oil supply disruptions is the simple fact that a smaller percentage of the world’s energy supplies now comes from the Middle East.
In recent decades, oil production has surged in new basins such as the US, Brazil, Guyana, Canada and even China.
OPEC’s share of global oil supply declined from over 50% in the 1970s to 37% in 2010 and further to 33% in 2023, according to the International Energy Agency, largely because of surge in shale oil production in the US, the world’s largest energy consumer.
To be sure, the global oil market was well supplied going into the latest conflict, further alleviating concerns.
Ultimately, therefore, the Israel-Iran war is further evidence that the link between Middle East politics and energy prices has loosened, perhaps permanently. So geopolitical risk may keep rising, but don’t expect energy prices to follow suit.
Ron Bousso is the Reuters energy columnist.
