The price of U.S. crude oil has been highly volatile due to escalating tensions in the Middle East with the anticipation of a potential retaliatory attack by Iran against Israel, which has caused fluctuations in oil prices after hitting a six-month low in early August. West Texas Intermediate (WTI) crude oil had closed at a six-month low on August 5; however, after a climb, oil prices have been on a downward trend this week as world leaders desperately attempt to quell Iran’s ire and traders continue to weigh the threat of escalation in the region. We’ll explore the various factors at play making crude markets a wild ride.
Geopolitical Tensions Roiling Oil Prices
Israel’s preparations for a potential attack by Iran, following the assassination of Hamas leader Ismail Haniyeh in Tehran at the end of July, have added fuel to the fire in the region. These tensions created a floor for oil prices amidst market uncertainty. In a Reuters article, John Kilduff of Again Capital noted that the recent market tumult has impacted oil prices, suggesting that prices would likely be higher without such instability.
On Tuesday, August 5, West Texas Intermediate closed at $72.94 per barrel, its lowest since February 2 when it closed at $72.28. On August 5, Brent closed at $76.30 per barrel, its lowest since January 29, when it closed at $77.33. After the August 5 bottom, WTI and Brent rallied through August 12, increasing 9.7% and 7.8%, respectively. Since then, however, prices have moved in a downward trend as Israel and the world at large wait with bated breath for an attack that may or may not come.
Will Middle East Conflict Threaten Supply?
Despite escalating pressure, the oil market has not faced significant disruptions in crude supplies. Analysts have warned that a direct conflict between Israel and OPEC member Iran could disrupt oil flows. Recent reports of a rocket attack on a U.S. base in Iraq, which injured seven American personnel, adds additional angst to an already tumultuous situation. Adding volatility, the attack may be a potential precursor to pulling in additional players like the U.S. to protect its interests in the region.
In an CNBC interview, Daniel Yergin, vice chairman of S&P Global, highlighted the surprising lack of preemptive pricing in the oil market given the imminent conflict risk in the Middle East. On a positive note, Yergin expressed his view that the market’s resilience indicates a level of underpricing of geopolitical risks.
World Leaders Scrambling to Reign in Unrest
Iran’s threatened retaliatory strike on Israel over the assassination of Hamas official Ismail Haniyeh has drawn major world powers into high-stakes diplomacy. Efforts to prevent an Iranian strike could support ongoing cease-fire talks in Gaza, following a three-phase proposal put forth by the Biden administration, with the express hope of a cessation of hostilities, as well as the release of Israeli hostages held since Hamas’s October 7 attack.
Failure to ease tensions could result in additional drone and missile attacks by Iran and its proxies such as Lebanon’s Hezbollah militia. Coordinated attacks may strain Israel’s missile defenses and lead to a broader regional conflict. That possibility has prompted a flurry of diplomacy, with France, Germany, and the U.K. urging Iran and its allies to avoid further escalation.
British Prime Minister Keir Starmer warned Iranian President Masoud Pezeshkian of the serious risk of miscalculation and urged calm. Pezeshkian rebuffed this call, emphasizing Iran’s right to respond to aggression. The Vatican’s Cardinal Pietro Parolin and German Chancellor Olaf Scholz have also approached the Iranian president regarding the threat of retaliation.
In response, the United States has bolstered its military presence in the Middle East to prepare for the heightened threat level, deploying additional forces and assets to the region. Russia has also engaged with Iran, with officials urging de-escalation and political solutions to avoid regional disaster.
China has also been increasing its diplomatic efforts in the Middle East, mediating deals between Iran and Saudi Arabia and hosting negotiations between Hamas and Fatah. The Chinese government’s involvement in the region could potentially shift the balance of power and influence, undoubtedly impacting the dynamics of the Middle East conflict. China has called for an end to the Gaza conflict and supported international efforts towards a cease-fire.
Stay Informed on Current Events Shaping Markets
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