2023-11-07 15:36:02
Special oil prices
The tensions taking place in the Middle East region, specifically with regard to the ongoing escalation between Hamas and Israel since the seventh of last October, have increased oil markets’ concerns regarding potential broad risks, especially if the conflict expands and extends.
The markets received the first shock, and then remained relatively stable amid fluctuations in prices last month, which led to declines in losses amounting to more than 8 percent in October (US West Texas Intermediate crude lost 10.8 percent, while Brent crude recorded monthly losses of 8.3 percent).
This comes despite various scenarios that expected record price increases in line with the escalation of current tensions. However, the markets turned their back on those fears, driven by a number of key factors. Among them are factors related to the geopolitical developments themselves and the escalation in Gaza (reduced fears related to the expansion of the conflict, which gave a boost to the markets), and other economic factors, including those related to Venezuelan oil, with the United States moving this month to significantly ease its sanctions on its oil sector.
In addition to these factors, there is the increase in US inventories, in addition to the disappointing performance of the Chinese economy, along with recession fears that affect the fate of the global economy.
But analysts believe that the low levels of oil prices (compared to estimates following October 7) are vulnerable to widespread fluctuations, as they are hostage to developments regarding the scene in Gaza.
Key factors
From London, Dr. Nihad Ismail, an expert in energy economics, says in exclusive statements to the “Eqtisad Sky News Arabia” website that oil prices recorded a decline of 8 percent during the month of October, and last week prices fell by 6 percent, attributing this to a number of factors. The main ones are as follows:
Reports related to the rise in Iranian production and export. Negotiating the lifting of sanctions on Venezuelan oil, which will bring 500,000 barrels per day to the market soon. Concern regarding the Chinese economy has increased, in light of disappointing economic data. The war in Gaza so far has been geographically limited to Gaza only, and has not expanded, while fears have been of expanding the scope of the war (..) and obstructing navigation in the Strait of Hormuz. Rising US inventories have little impact.
According to US Energy Information Administration data on Wednesday, crude oil and gasoline inventories rose in the week ending October 27.
Crude inventories recorded 774 thousand barrels last week to 421.9 million, compared to expectations of analysts polled by Archyde.com for an increase of 1.3 million barrels.
Ismail points out the World Bank’s warnings regarding oil prices reaching $150 per barrel if the recent tensions in the Middle East region worsen.
The World Bank developed three possible scenarios (according to a comparative view of the risks with previous historical crises in the region).
The first scenario indicates a decline in production by regarding 500,000 to 2 million barrels per day, pushing prices to levels between $93 and $102 per barrel in the fourth quarter (a scenario identical to the impact of the war in Libya in 2011 on the markets).
While the second scenario (which is consistent with the impact of the 2003 Iraq War on oil prices) assumes a reduction in global oil supplies by 3 to 5 million barrels per day, and the price of a barrel reaching between 109 and 121 dollars.
The third scenario is to reduce global oil supplies by 6 million to 8 million barrels per day. This would raise prices to $140 and $157 per barrel, a jump of up to 75 percent, compared to the impact of the Arab oil embargo in 1973 during the October War.
The expert in energy economics adds: “The markets ignored the element of the so-called “war risk premium,” but while prices are low during the month, this depends on developments on the scene, and the picture may change completely in the coming weeks and we see a significant rise in prices (according to developments in the situation).
Ismail points out that predictions of rising prices are still low, pointing to Standard Chartered estimates, which indicate a possible arrival of oil prices to $98 per barrel during the current year.
But at the same time, he believes that “as soon as the circle of tension expands and Iran intervenes militarily and American strikes occur, prices may double, reaching the threshold of $200.”
The two crude oil prices (Brent and US West Texas Intermediate) ended the week lower, as Brent crude suffered losses of regarding 4.8 percent, and American crude fell by regarding 6 percent.
In a related context, the official Saudi News Agency quoted an official source in the Ministry of Energy as saying that the Kingdom is continuing the voluntary reduction of one million barrels per day, which began to be implemented in July 2023, and was later extended until the end of December 2023, and thus production will be The Kingdom in December 2023, approximately 9 million barrels per day.
Dispel fears of expanding conflict
Amer Al-Shoubaki, an economic researcher specializing in oil affairs, says in exclusive statements to the “Eqtisad Sky News Arabia” website:
Oil prices erased the gains achieved since the beginning of the tensions in Gaza on the seventh of last October, following they finally returned to decline and lost the gains they had achieved by three to five dollars per barrel in the beginning. There are a number of reasons; The first is related to developments on the ground. After the Israeli forces entered Gaza by land, parties that had previously threatened to intervene when the tensions began began, which threatens the expansion of the war. With the non-interference of these parties, fears of expansion dissipated. Now the “battle” comes within a scope between Israel and Gaza, and therefore the routes of oil or global supplies are not affected, compared to the fears of the conflict expanding north to Lebanon and the entry of Hezbollah, which threatens the intervention of Iran, which is an oil-producing country and has its influence, and thus the important corridor is affected, which is Strait of Hormuz. The decline of these fears clearly led to a decline in oil prices, in addition to other factors, including fears of a global economic recession and the general weakness of the global economy. Among the factors are also the high inventories in the United States of America, which were among the reasons for the decline in fears.
It is noteworthy that the Strait of Hormuz – which extends regarding 21 nautical miles and is located in the Gulf region and separates Iran from the north and the Sultanate of Oman from the south – is one of the most important waterways in the world, and regarding 20.5 million barrels per day pass through it, from the Gulf states and Iran. According to data issued by the analytics company Vortexa.
But Al-Shoubaki believes that the current geopolitical tensions create an opportunity for higher jumps in oil prices depending on developments on the scene, especially if Iran intervenes in this conflict or expands its current scope further into the region.
In a related context, the economic researcher specializing in oil affairs points out that this does not apply to gas prices, which are still high, between 50 or 55 euros per megawatt hour in the European market, especially with the closure of the Israeli Tamar field.
The World Bank estimates that the average price of a barrel of oil is expected to reach $90 in the fourth quarter of the year.
While the bank warned that the repercussions of the recent escalation of the conflict in the Middle East (tensions between Hamas and Israel) might lead to a significant increase in prices.
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