The recent escalation in regional tensions sparked a sharp response across global markets, with oil prices briefly surging above $80 amid heightened uncertainty. Fortunately, the situation evolved rapidly. Nerves had calmed when a temporary ceasefire was announced.
This also served to ease immediate concerns around important energy routes such as the Strait of Hormuz. Oil markets adjusted accordingly, with prices falling below $70 within hours.
While the geopolitical situation remains fluid, the recent developments reinforce our long-standing view that the likelihood of sustained and material disruption to oil supply remains low. Historically, price spikes driven by geopolitical tensions are usually short-lived, and often return to baseline in weeks rather than months; the recent situation is likely to follow this pattern.
Vital export infrastructure around the Arabian Gulf remains fully operational and trade flows are uninterrupted at this time. Shipping costs did briefly reflect elevated risk perceptions, but fortunately no significant bottlenecks materialised.
Most geopolitical conflicts in recent years have nourished supply fears without causing actual supply disruptions. Even disruption – events that curbed oil flows out of the region, such as the attack on the Saudi Khurais terminal in 2019, only briefly jolted oil prices.
We need to look back all the way to the early 1990s and the Gulf war to find a geopolitical conflict that caused serious supply disruptions and price spike that lasted months rather than weeks.
The oil price reaction was to some extent surprisingly unemotional, not least given that the Israel-Iran war was among the main wild cards for oil. One explanation is the resilience of today’s oil market. Storage is ample in the Western world, and especially in China.
Saudi Arabia, Kuwait, and the UAE have plentiful spare capacity, exceeding 5 per cent of global output, which they have just begun to bring back to the market. Exports are incrementally growing from the Americas, and Brazil and Guyana specifically. Demand is soft for economic and structural reasons. The oil market is heading for a surplus as South American supply on its own is sufficient to meet projected overall demand growth this year.
China, the major buyer of Iranian oil, is itself undergoing a significant transition as its dependence on oil imports begins to ease.
Road fuel demand is softening due to electric vehicle sales now accounting for more than half of new car registrations. Meanwhile, the country’s petrochemical sector is shifting away from crude oil feedstocks towards alternatives like natural gas liquids, which is supported by the liquefied natural gas boom. This shift points to longer-term structural changes in global consumption that reinforce the sense of supply abundance.
Although geopolitics and supply fears are at the forefront of people's minds these days, oil prices are trading at almost half the levels seen in the early 2010s after adjusting for inflation. The oil market has changed significantly in the meantime and has become more resilient. Today’s geopolitics is unlikely to change the big picture and the established fundamental trends.
Adding to the supply abundance is the petro-nations' U-turn from defending prices to regaining market share. These dynamics are increasing competition and putting downwards pressure on prices, to the point where something in the market gives way. In this case, it is US shale oil drilling and output at around $60.
The US's energy dominance appears to be peaking. Likewise, the shadow oil market should continue to thrive. There will always be demand for discounted oil sourced outside of Western sanctions. These flows add to today’s supply resilience. Irrespective of the outcome, the current conflict will have little impact on the multipolar world order, of which these oil flows are just one symptom.
The oil market remains on a twisted road to abundance, which should pressure prices back towards $60. Geopolitical tensions seem to be a distraction on this pathway, an element that fuels sentiment swings.
The bearish market mood in May provided room to support the price bounce with futures positions shifting towards the long side. But as the situation calmed, those positions reversed, prices began to align with fundamentals and the sentiment-related risk premium deflated.
Geopolitical events will always be a feature of oil market dynamics. But their impact should not be overestimated.
Norbert Ruecker is head of Economics & Next Generation Research at Julius Baer
