Growing Conflict Across the Middle East Causes Global Uncertainty in Oil Markets

An oil platform in Israel's offshore Leviathan gas field is seen while an Israeli navy vessel patrols the Mediterranean Sea, Israel, Friday, Sept. 20, 2024. (AP Photo/Ariel Schalit)

Speculation of attacks on Iranian oil supplies have caused global oil prices to spike. Fears of disrupted supply have led to sharp price fluctuations, raising concerns of a direct impact on supply and consumer prices.

The expanding conflict between Israel and Gaza has shocked the global oil market. With the hostilities now involving Lebanon and Iran, the increased risk of fluctuating oil prices and global supply shift has risen dramatically. 

CNBC reported that oil prices rose by more than 7% after Iran fired missiles at Israel on Oct. 1. Euronews reported similar numbers –  9% – which was the biggest weekly gain since last March. The threat of an Israeli retaliation strategy to hit Iran’s crude industry may give way to a shock in the global oil supply, thus resulting in the surge of oil prices. 

Iran is one of the top global oil producers, currently supplying nearly 2% of exports. Therefore, any attack on its oil reserves affects not only Iran, but countries that rely on their abundant resources. 

Iran threatened to block the Strait of Hormuz if Israel targets Iranian oil facilities. The Strait of Hormuz is a critical point of global oil transportation, where around ⅕ of the world’s oil supply flows through. Qatar, another of the world’s biggest producers of natural gas, also uses the Straight for exports. Thus, this could not only lead to a price spike in oil, but could also severely disrupt the global supply chain and affect consumers everywhere. 

President Joe Biden has warned Israel to not target Iranian oil facilities, but it has not been confirmed whether or not Israel will comply.

Escalations between Israel and Lebanon have also affected the market oil prices. A possible Hezbollah-Israel ceasefire sparked by the increased stakes in southern Lebanon caused oil prices to stabilize, settling between $73.57 and $77.18 a barrel. Both Brent crude futures and U.S. West Texas Intermediate futures had a decrease over $4 a barrel. On Oct. 7, Brent had risen to over $80 a barrel, with more than a 3% gain. 

Projectiles fly through the sky in central Israel as a siren sounds a warning of incoming missiles fired from Iran towards Israel, Tuesday, Oct. 1, 2024. (AP Photo/Ohad Zwigenberg)

However, due to the lack of a direct supply disruption in the Middle East – as these fluctuations were a response to merely threats – oil prices are likely to stabilize again and only rise if there is actual disruption. Nonetheless, they will still continue to shift periodically alongside further developments, such as Israel’s potential retaliation against Iran. 

For now, organizations have raised their oil price forecasts, with Morgan Stanley raising theirs from $75 to $80 per barrel, citing geopolitical factors in their assessment. As the conflict spreads across Israel, Gaza, Lebanon and Yemen, the hike is expected to continue as well. 

Some investors are still awaiting future talks between the U.S. and Israel on the war, while others are waiting for active movement in the supply chain. Analysts claim that even if Israel decides to attack a country other than Iran, prices could face downward pressure.

Regardless, the impact of oil prices will likely intensify as the price surge will likely hit consumers soon. Although OPEC, The Organization of the Petroleum Exporting Countries, is said to have a spare capacity in oil production that could be used if there is a disruption in Iran's oil supply, it could still lead to long-term disruptions in the market for oil.

Moreover, some countries that are a part of OPEC may not react immediately to supply chain disruptions. In fact, given OPEC’s history of decreasing production to increase pricing, there is little guarantee that the extra capacity will do anything to stop disruptions. 

The current oil prices are dependent on the developing tensions of the Middle East. The greater the risk of escalation in the region, the higher the chance of a shock in the oil supply and an increase in oil prices, ultimately affecting global consumers from the US all the way to China.