Is geopolitics becoming a sideline player in oil price fluctuations?

When geopolitical crises occurred, major oil price shocks used to inevitably follow, with the sudden price spikes often affecting economies and industries around the world. Surprisingly, that effect has been lessening in recent years.

Instead, market dynamics, supply and demand and economic indicators are playing a more significant role in shaping the price of oil, analysts have said.

This is one of the most geopolitically turbulent periods in decades. Two wars, attacks on commercial vessels in the Red Sea and a production halt by Libya, a major crude producer, have had a surprisingly limited impact on oil markets this year, despite millions of barrels of supply being at stake.

The Ukraine war briefly pushed oil prices to multiyear highs in 2022 as traders feared that western sanctions on Russia’s energy industry would disrupt exports of roughly eight million barrels per day. However, oil futures quickly stabilised as the market adapted by finding alternative buyers and shipping routes.

Brent crude oil, the global benchmark, declined to around $78 per barrel at the end of 2022, despite earlier predictions of reaching $200 per barrel, after peaking near $140 in March that year.

In recent months, the risk of an all-out regional war in the Middle East – a region responsible for about a third of the world's oil production – has dramatically increased, with Israel’s war in Gaza escalating into Lebanon.

Israel and Iran – one of the world’s largest oil producers – have engaged in a series of “tit for tat” strikes since April, raising concerns about vital energy infrastructure being targeted.

Despite the geopolitical upheavals, Brent has fallen by 18 per cent since reaching a six-month high of $91.17 a barrel on April 5. It is down just more than 4 per cent since the beginning of the year.

A month-long disruption to Libyan oil production, caused by a political crisis, halved the country's output but had minimal impact on oil prices, with Brent crude dropping 3 per cent during the shutdown from late August to early October.

Demand uncertainty

Analysts and economists attribute the lack of market reaction to two main factors: weakening Chinese demand and ample spare capacity among Opec+ nations, who are responsible for roughly 40 per cent of the world's crude production.

“Strong supply levels and weakening demand, particularly from China, have kept prices in check, amid shifting market assessments of the risk to oil infrastructure in the Middle East,” the World Bank said in a report this month.

China, the main engine of global crude demand over the past two decades, is facing an economic slowdown, driven by a property market downturn, weak consumer spending and a decline in manufacturing.

China's crude oil imports in October totalled 44.7 million tonnes, marking a 2 per cent decline from September and a 9 per cent decrease year-over-year, according to Chinese customs data.

The International Energy Agency expects China's oil demand growth to slow to 140,000 barrels per day this year, a tenth of last year's 1.4 million bpd increase, contributing to a 1 million bpd global supply surplus in 2025.

The agency has said that China's petrol demand will peak this year, followed by diesel demand peaking next year, as electric vehicle adoption grows at a rapid pace in the world’s second-largest economy.

In the first nine months of 2024, new energy vehicles (NEVs), comprising electric, plug-in hybrid, and fuel cell vehicles, represented nearly 39 per cent of new car sales, up from 31.6 per cent in the entire previous year, the South China Morning Post reported.

“The slowdown ahead has implications for the oil market and oil prices,” academics from the Centre on Global Energy Policy at Columbia University said in a report last week.

“For world oil consumption to continue to grow at the historical one-plus million bpd per year rate, other countries/regions such as Africa, India, and South-east Asia will have to achieve nearly all these gains,” they said.

Spare capacity

The Opec+ alliance, which includes Saudi Arabia and Russia, has about 6 million bpd of spare capacity to offset any potential supply disruptions, preventing oil prices from surging.

The downside risks to oil prices have built this year as demand growth has disappointed, non-Opec+ supply has gained, and the alliance has relied on Saudi Arabia-led “voluntary cuts” to keep the market in-check, Ehsan Khoman, MUFG's head of commodities, ESG and emerging markets research, said in a research note.

“Beyond the tepid cyclical nature of the market, the build-up in substantial Opec+ spare capacity is reinforcing the ceiling for sustainable price gains,” Mr Khoman said.

“This creates conditions where prices are likely to soften into next year, particularly with Opec+ looking set to lift production in a bid to regain market share.”

The group, which currently has supply curbs of 5.86 million bpd in place, plans to unwind voluntary output cuts of 2.2 million bpd starting from January next year.

Opec's spare oil production capacity will increase to 8 million bpd by 2030 on planned capacity additions by member countries, according to the IEA.

Major oil price shocks

Arab oil embargo

During the 1973 Arab Israeli War, Opec’s Arab members imposed an oil embargo on the US and other nations that supported Israel in response to American resupply of the Israeli military. The resulting production cuts nearly quadrupled the price of oil from $2.90 a barrel before the embargo to $11.65 a barrel in January 1974.

Iran-Iraq war

The 1979 Iranian Revolution and the 1980 Iran-Iraq War significantly increased global oil prices, rising from $14.95 in 1978 to $37.42 per barrel two years later.

Gulf war

In August 1990, Iraq's invasion of Kuwait caused a sharp increase in oil prices, pushing them from around $65 to over $90 per barrel. However, after a US-led coalition's victory in early 1991, oil prices dropped to around $44 per barrel.

Asian financial crisis

The crisis, which began in Thailand in 1997 and spread across the region, led to severe economic downturns in affected countries. These countries experienced high unemployment rates, poverty, and social unrest. Oil prices plummeted from an average of $17 per barrel in late 1997 to a low of more than $10 per barrel.

9/11 attacks

Following the terrorist attack on US business and military centres on September 11, 2001, Brent prices rose by 5 per cent. However, within two weeks, prices fell by about 25 per cent due to concerns over declining oil demand.

Great recession

The 2008 financial crisis and the subsequent Great Recession severely impacted the oil and gas industry, leading to a sharp drop in oil and gas prices and a credit crunch. Oil prices fell from a high of $133.88 in June 2008 to a low of $39.09 in February 2009.

Oil glut

Oil prices plummeted by more than 70 per cent between mid-2014 and early 2016, largely driven by increased US shale oil production and improved efficiency within the sector. This resulted in the US becoming a major player in the global oil market.

Covid-19 pandemic

The Covid-19 pandemic caused oil prices to plummet due to decreased global demand from lockdowns and economic restrictions, leading to a surplus of oil in the market. In April 2020, West Texas Intermediate futures, the US crude benchmark, fell below zero for the first time since trading began in 1983.