Could Middle East war drive oil price to $300?

Geopolitical tensions in the Middle East usually have a limited temporal impact on the oil market. Elevated levels generally last for about 20-30 days and the future of the raw material depends on the fundamental situation, which is currently quite mixed in the oil market.

This week, as expected, OPEC+ decided to stick to the production limits set for the enlarged cartel. Earlier this year, a decision was made to slowly increase production from October, which limited price increases this year and reduced the chances of increases to USD 100 per barrel.

Slightly lower oil prices and weak demand from China are playing a role in the decision by OPEC+ to keep production unchanged in the third quarter of this year.

What about the potential for escalated Middle East war?

So far, retaliatory actions by both sides have not led to full-scale conflicts between Israel and Hamas or Israel and Iran. Israel has not admitted to the recent attacks, so it is difficult to see how the situation could escalate significantly. If Iran joined an open conflict, it could cause significant market movements, however.

First of all, Iran is responsible for oil production of approximately 3.2 million BRK (kilo-barrels) per day. Iran also officially exports approximately 1.5 million BRK per day, despite ongoing sanctions from the US and Europe.

However, this oil mainly goes to countries that are not necessarily in alliance with the United States. The key player in this respect is, of course, China.

Could we see $300 oil price this year?

On the other hand, Iran has a more important bargaining chip than its exports. Iran controls one of the most important bottlenecks in the oil market, the Strait of Hormuz. A possible blockage could result in a sudden loss of supply of 20 million BRK per day, which would lead to an increase in oil prices not only to record highs but also to levels of USD 200-300 per barrel, according to some energy analysts.

This scenario is, of course, unlikely, because the American fleet is active in this region and it would lead to a violation of the interests of the most important player in OPEC, i.e. Saudi Arabia. However, the threats themselves may lead to increased volatility in the oil market.

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Arab countries doubt that peace can be achieved in the Middle East at this point, but at the same time, a significant escalation of the situation in the form of an open war between several parties is not widely expected. According to Iranian media, possible peace talks may be delayed for many months. On the other hand, the White House does not seem to be saying that there will be a suspension of talks that are intended to lead to a ceasefire between Israel and Hamas.

In the longer term, production and demand data are on the cards in the oil market. If OPEC+ continues to focus on increasing production and data from China do not show recovery, oil prices may permanently fall to around USD 70-80 per barrel. However, in the coming weeks, we can expect increased volatility and prices to remain around USD 80 per barrel.

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