No major impact expected on crude prices of Middle East war escalation, say experts

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Crude oil prices are expected to remain largley unaffected by the escalation of the conflict in the Middle East after Israel carried out airstrikes on central Beirut on September 30, according to experts.

Waning demand from several countries, primarily China, have weighed on crude oil prices in recent months, offsetting the impact of heightened geopolitical tensions. Benchmark Brent has been hovering around $70 per barrel for over a month now and nosedived to $69 a barrel on September 10, the lowest in three years.

“Israel is not largely an oil producer and Iran (an ally of the Hezbollah, which fired rockets into Israel in early October, triggering the crisis) which is already under sanctions is selling limited quantities only to countries like China. So, more or less, the impact on oil prices will happen only if this escalates into something bigger, impacting other regions or the Strait of Hormuz. As of now, there hasn't been more of an impact than the Red Sea crisis so far. In the Red Sea, because of the attacks by the Houthi rebels, oil tankers are now taking a long route via the Cape of Good Hope. But as of now, it is not really the oil-producing regions. And unless they get embroiled in this, it will not impact crude oil prices much,” said Prashant Vasisht, vice president and co-head, corporate ratings, ICRA.

Like the Red Sea, the Strait of Hormuz is a key shipping channel for crude oil carriers. Experts believe that crude oil prices in the near term would be driven by demand as the conflict has had limited impact on the oil market.

“As we know, the geopolitical crisis has been around for quite some time. The expectation is that the conflict will continue but it's not going to escalate so quickly. The countries are very careful to not tread the full-escalation path. The developed nations are also advising against it. If that (an escalation) doesn't happen, then I don't see much impact on the price, or basically on supply, which will drive the prices. So until that happens, I think we have seen how the oil prices have behave, which is mainly in response to the China slowdown and the overall kind of global slowdown. So we shouldn't expect prices to jump, unless there is some unexpected major conflict. We expect prices to be contained in around this level, which is $70 to $75 for Brent,” said Suman Chowdhury, chief economist and head of research, Acuite Ratings & Research.

Morgan Stanley in September said that the global oil market is facing a period of demand weakness similar to that seen during recessions. Slowing consumption from China due to weaker-than-expected economic growth and deeper penetration of cleaner fuels and electric vehicles in that country has reduced its offtake of crude oil, resulting in plummeting to around $70 a barrel from highs of $90 per barrel seen in April 2024. In its latest report, the Organisation of Petroleum Exporting Countries (OPEC) has cut its forecast for oil demand growth from China to 653,000 barrels per day (bpd) from 700,000 bpd for 2024.

Moreover, the US is pumping record-high levels of crude oil this year, leading to worries of an oversupply in the market amid dwindling demand. Oil supply from other countries including Libya and some Middle East countries is also expected to rise.

“Crude oil exhibited significant volatility, closing on a mixed note. Prices are facing downward pressure due to concerns over a potential production increase by OPEC+ from December, along with the resumption of Libyan output following the resolution of internal disputes. Demand concerns are also weighing on prices; however, these are being offset by tensions in the Middle East and the US replenishing its SPR (strategic petroleum reserve),” Rahul Kalantri, vice president, commodities, Mehta Equities, said in a note.

Global oil prices have been highly volatile this year, breaching $90 per barrel in April due to geopolitical tensions in the Middle East, before plummeting to around $70- 72 a barrel currently due to demand concerns from China.

The first half of the year saw relatively high prices on account of supply cuts from OPEC and its allies (OPEC+) and Middle East tensions. However, prices soon began falling due to the limited impact of the war on the crude oil market.