Tension in West Asia: Where are crude oil prices headed?

Global oil prices held steady near $85 a barrel, but traders remain cautious following the eruption of violence between Israel and Hamas, which could potentially disturb the oil supply chain in the Middle East.

Prices clocked one-year highs at the end of September, driven by worries about supply shortages after a surprise extension of voluntary supply cuts by Saudi Arabia and Russia, but the momentum was short-lived. An unexpected buildup in US crude inventories and concerns over demand adversely hit the sentiments.

However, extreme uncertainty prevails in the global oil market as the ongoing clash between Israel and Hamas sparks fears that the turmoil could spread across West Asia and threaten the world’s oil supply.

The direct impact on oil prices is limited, as neither Israel nor Gaza produces significant amounts of oil. However, the escalation of tensions would adversely affect the oil supply chain in the Middle East.

The Middle East is a critical area for global energy production and transportation. Saudi Arabia, Iraq, UAE, Iran, and Kuwait are the key oil producers in the region, and they contribute more than 30% to the global oil production.

The present conflict can lead to concerns about regional stability and security, which can affect investor confidence and, in turn, influence oil prices. The regional instability may have ripple effects in the oil supply chain. Proximity to conflict zones can create security concerns, which may affect the safety of oil fields, pipelines, and shipping routes.
In the current market dynamics, Iran’s role is important as the country’s extra barrels help to balance the short supplies of Saudi Arabia and Russia as both voluntarily declared production cuts till December this year.As per reports, Iran’s oil production and exports have been increasing in the past several months with China being the top buyer. Amid US sanctions, the country produced 3.15 million bpd in August, making it the second-largest additional source of supply in 2023 after the US.

Any new sanctions against Iran or any risks to shipping and infrastructure could halt exports from the country and may lead to a shortage in supplies.

Nevertheless, the International Energy Agency suggests the Israel-Hamas conflict has not had a direct impact on oil flows and the agency is ready to act if needed to keep the market well supplied.

Looking ahead, traders remain cautious and watch for further cues from the Middle East to set a short-term price direction. While the demand growth outlook remains weak, worsening geopolitical concerns raise supply worries.

On the price side, NYMEX crude oil having stiff resistance at $95 a barrel, breaking of the same would extend rallies. If the West Asia tension worsens further and Iranian exports are impacted, Asian benchmark Brent crude may surpass $100 and extend the wave in the short run. Otherwise, prices are mostly likely to be range bound with mild negative bias.