The recent escalation of conflict between Israel and Iran has led to an immediate spike in crude oil prices, demonstrating typical market reactions to geopolitical crises. However, industry experts assert that despite a 7% increase within a few hours, prices peaked at $80 per barrel—a figure that remains lower than January’s market levels.
Rebecca Babin, a senior energy trader at CIBC Private Wealth, emphasized the market’s subdued reaction, noting, “We saw a lot of people … saying, ‘Why isn’t crude reacting more?'” This behavior appears counterintuitive given Iran’s status as one of the top ten oil producers globally, alongside its threats to disrupt the Strait of Hormuz, a crucial shipping lane for oil.
As the conflict unfolded, oil prices fluctuated further, particularly after the U.S. became involved, before subsequently declining as Iran refrained from taking actions that would impact oil supplies. In fact, crude oil prices are now lower than prior to Israel’s attacks in early October.
“The market has shown that it’s been very resilient to some of the geopolitical shocks that historically would have sent prices skyrocketing,” explained Angie Gildea, U.S. energy lead for KPMG. The phenomenon has manifested during previous geopolitical events like the Russia-Ukraine war and the Israel-Hamas conflict, where oil prices spiked only temporarily.
Gildea pointed out that the market’s tendencies have changed; traders are now more cautious given past experiences where predicted disruptions did not materialize. This behavioral evolution can be likened to the tale of the boy who cried wolf, as repeated false alarms diminish the urgency to respond when real threats arise.
Seasonal demand cycles also play a role in moderating oil prices. According to Susan Bell, senior vice president of commodities analysis at Rystad Energy, crude oil buyers are looking ahead to August and beyond, leading into the lower demand season typically associated with autumn in the Northern Hemisphere. This seasonal shift naturally alleviates pressure on prices.
Another significant factor in the current oil market is the global oversupply. Analysts refer to this as “the fundamentals”—the interplay of supply and demand fundamentals. Currently, global demand growth is sluggish, partially due to a lackluster Chinese economy, while supply continues to increase, fueled by OPEC and allied nations consistently adding more barrels to the market.
This oversupply contributes to declining prices and mitigates panic about possible supply disruptions.
Furthermore, the geopolitical landscape of oil has evolved dramatically over the past decade, primarily due to the U.S. shale revolution. As U.S. drilling technologies, such as fracking, enabled a surge in domestic oil production, global dependence on oil from the Middle East has decreased significantly.
Now, the United States stands as the world’s largest oil producer and consumer, which has drastically altered the impact of Middle Eastern conflicts on oil markets. Jim Burkhard, who leads crude oil market research for S&P Global, commented, “The impact on the oil market is profound. It is among the most important factors why the response in the oil market to geopolitical conflict in the Middle East is limited and often disappears once the fear of a potential disruption dies down.”
In this current market environment, not only does the U.S. produce a substantial amount of oil, but its efficiency in quickly ramping up shale oil production permits a rapid response to any significant supply disruptions that are likely to cause a sustained price hike.
President Donald Trump highlighted this aspect of production during recent comments urging oil companies to increase their output, stating, “drill, baby, drill.” However, it is crucial to understand that in the U.S. market, production levels are dictated by market forces rather than direct governmental oversight.
That market dynamic currently signals an oversupply situation. Burkhard noted, “We think — we’ve been saying for the last few months — U.S. production is going to decline.”
In conclusion, the overarching market driving forces suggest that oil producers would do well to adopt a more cautious approach in light of the current geopolitical uncertainties surrounding the Iran-Israel conflict. The combination of resilient market behavior, seasonal demand fluctuations, persistent oversupply, and shifts in global oil production dynamics render immediate panic over price changes less likely. Consequently, traders are encouraged to remain level-headed amid market fluctuations, as the call to action is to temper expectations rather than amplify fears.
image source from：npr
