By K Raveendran
Curiously, the Hamas attack and the Israeli reprisal coincide with the 5oth anniversary of the first oil crisis, which plunged the world into an oil shock of unprecedented proportions, causing energy prices to skyrocket and leading to fuel shortages, particularly in the United States. And by all indications, the results of the present conflict may be far less biting than the 1973 crisis.
The oil shock of that time was caused by the refusal of the OPEC nations to sell crude to the US in protest against the US support to Israel during the 1973 Yom Kippur War. The oil embargo was the Arab world's response to the then US President Richard Nixon's decision to provide Israel with $2.2 billion in emergency aid in the wake of the war.
The blockade effectively shut off the exports of Arab crude oil to the US, followed by a series of steep production cuts by the oil cartel members. Before the embargo, a barrel of oil traded for around $2.90, which quadrupled to $11.65 per barrel by January 1974. OPEC lifted the embargo in March 1974, but it took the US and the rest of the world considerable time to come out of the damage.
Experts are agreed on the view that while the immediate repercussions of the Hamas-Israeli conflict on oil markets might not mirror the events that took place 50 years earlier, although secondary effects may be significant in the days to come.
According to Rystad Energy, the impact on crude supply from countries directly involved in the conflict is expected to be relatively limited. While the Israeli Energy Minister recommended shutting offshore operations, Israel's total crude production hovers around 20,000 barrels per day (bpd). In terms of crude demand, refinery capacity in the region amounts to approximately 300,000 bpd, mostly feeding internal fuel supply. There are no clear indications yet of refineries shutting down due to the conflict as of now.
Analysts say the most pronounced impact on the oil market will be from secondary drivers, primarily stemming from the relationship between the Iranian government and Hamas. An immediate concern is the potential Israeli perception that Iran actively collaborated in the actions, leading to a direct escalation against Iran. While such an escalation remains unlikely, if it were to occur, it could mean a disastrous amplification of the regional conflict. A more probable outcome is Israel framing the narrative against Iran, pressuring its most important ally the US to pullback on the recent softening in relations with Tehran under President Joe Biden's administration. Iranian crude exports have surged by over 700,000 bpd between the first quarter of 2021, at the beginning of the Biden administration, and the third quarter of this year.
This increase can be attributed to a marked rise in the share of exports to China over the recent years. A stricter enforcement of sanctions on Iranian oil could be the most significant repercussion in the coming months. This would compel China to diversify its supply sources, enhancing Saudi Arabia's market leverage and potentially alleviating pressure on other sanctioned countries such as Russia and Venezuela.
Another possible secondary effect is seen to be a halt in the diplomatic normalization process between other Islamic nations like Saudi Arabia and the UAE. Riyadh had hinted that it might ramp up production early next year if oil prices remain elevated. This deal might see the kingdom recognizing Israel in exchange for a defence agreement with Washington. If Saudi Arabia chooses to extend its voluntary production cuts into 2024, market tightness is set to persist, sustaining even higher oil prices next year and putting pressure on fuel costs and inflation in an election year in the US.
The US is currently in a different position than it was in early 2022 during the onset of the Russia-Ukraine war. After a massive release of 230 million barrels from its reserves, the US now has less flexibility to use its strategic reserves in response to potential crude supply shocks.
Crude price movement has shown a cautiously bullish trend since the weekend. The ICE Brent December 2023 futures is experiencing an increase of around $3-$4 per barrel compared to Friday's close but have yet to rebound to the $90 per barrel level observed in the previous weeks.
Rystad has not changed its forecast of an average of $91 per barrel in the fourth quarter and $89 in 2024., although it recognises the fact that, given the recent events, the risk balance is now leaning more towards our high-case scenario in the upcoming quarters. This shift is particularly contingent on the secondary ramifications of the conflict, with a special emphasis on potential Iranian state involvement.
Its signposts for the turn of events include Israeli forces amassing in preparation for a potential ground assault on the Gaza Strip, which makes the situation volatile as any incursion could significantly intensify the conflict. It is also looking for greater clarity over Hamas' foreign support, especially from Iran. Confirmation or refutation of Iran's role could influence the trajectory of the conflict and international responses.
Also on focus is on Western nations, particularly the US, will react. If Iran's active involvement is substantiated, there might be a more robust response, including the potential tightening of sanctions on Iranian crude exports.
Perhaps the most crucial factor is the stance of Saudi Arabia, especially given its agreement with the White House and its diplomatic ties with Israel. Any shift could also impact the kingdom's voluntary reduction of 1 million bpd in oil production, which would have ripple effects on global oil markets. (IPA Service)
