The Israel-Hamas conflict has emerged as a significant concern for the oil market, with potential implications for global oil prices. Analysts are warning that this conflict, which has been described as a ‘black swan event,’ could push oil prices to $150 per barrel. The key factor driving this possibility is the fear of regional entanglement, particularly involving Iran. There are concerns that Iran may provide advanced weaponry to Hamas, which could escalate the conflict further. Additionally, Iran’s influence on Hezbollah may lead to a second front against Israel, potentially prompting Israeli strikes on Iran. In response to such strikes, Iran could choose to close the Strait of Hormuz, a crucial global oil passage.
This closure of the Strait of Hormuz would disrupt oil supplies and result in price surges, ultimately leading to increased energy costs and contributing to inflation. The commodity trading world is uneasy as it grapples with the unexpected nature of this conflict and acknowledges its potential reverberations. While some argue that the impact of this event on global oil prices and the broader economy has been limited, a closer examination reveals a more complex reality.
Looking back, historical instances of geopolitical turbulence have sent shockwaves through the oil markets. The Yom Kippur War of 1973 serves as a striking example. Following the initiation of an oil embargo by Arab states in response to this war, oil prices experienced a meteoric rise. Prices quadrupled, surging approximately 300% to 400% in bustling trading hubs like New York. This shift had a global ripple effect, with economies beyond the United States feeling the impact.
At the time, the crucial question was how the United States would respond to this oil crisis, particularly if it actively engaged in the ongoing conflict. The mere contemplation of US involvement could trigger a strong reaction from OPEC and potentially lead to an oil embargo targeting not only the United States but also Europe. The Strait of Hormuz, controlled by Iran, holds a crucial position in the global oil market. Any disruption in the smooth passage of oil through this strait would have significant implications for global energy security.
The current situation raises concerns about the potential shutdown or disruption of the Strait of Hormuz, coupled with Russia’s oil and gas embargo. Such disruptions point to oil and liquefied natural gas prices reaching unprecedented heights. Moreover, the closing of pipelines delivering Russian gas to Europe adds to the precarious equation. The Israel-Hamas conflict poses a significant threat to energy security in Europe, especially as Russian gas supplies face impediments.
In this context, questions arise about the use of strategic petroleum reserves. Despite their intended purpose for scenarios like wars and crises, the Biden administration has been continuously depleting the Strategic Petroleum Reserve (SPR) without any plans to replenish it. Some speculate about whether this depletion is a calculated strategy to undermine Russia.
The Israel-Hamas conflict sets the stage for potential tremors in oil prices when the Biden administration ultimately decides to refill the strategic petroleum reserves. This situation presents a compelling drama with geopolitical intricacies and economic repercussions. As the United States depletes its reserves, China actively builds its stockpiles through acquisitions, potentially benefiting from anticipated discounts from Russia. Simultaneously, OPEC+ and Saudi Arabia implement production cuts, creating a harmonious symphony of supply-side management.
However, the prospect of resurgent inflation and sustained high interest rates remains a concern for both supporters of Bidenomics and Federal Reserve Chair, Jerome Powell. History warns that surging energy prices have often played a significant role in pushing the US economy into a recession. Additionally, China’s growing economic might and insatiable appetite for oil are expected to have a substantial influence on oil prices in the coming year. Even if OPEC+ manages to exert upward pressure on prices, the prospects of China’s demand surpassing expectations suggest a seismic shift in the global oil market, with prices potentially approaching $150 per barrel.
In this complex oil landscape, where geopolitics, insufficient investment, and the rise of emerging superpowers converge, the path to $150 per barrel is not a matter of “if” but rather “when.” The stage is set, the players are in position, and the world eagerly awaits the next act in this captivating drama, with the potential for a black swan event to spread its wings.