Oil Prices Rise Amid Heightened Military, Political Tensions in the Middle East

Kristian Rouz – International oil prices posted modest gains amid the rising tensions between the UK and Iran over last week's seizure of a British tanker by Iran. Investors expect the standoff could escalate, disrupting the supply side of the global energy market as roughly 30 per cent of maritime crude shipments go through the epicentre of Iranian tensions, in the Strait of Hormuz.

Additionally, Libya announced a shutdown of its biggest oilfield amid continued fighting between rebel forces and the UN-backed government in Tripoli.

Both these factors pushed Brent oil prices up 1.6 per cent to $63.45/ bbl in early Monday trading in London. US crude added 0.8 per cent overnight on Monday to $56.10/bbl. 

The gains came after a significant retreat in energy prices last week, Brent having crashed 6 per cent, and WTI losing 7 per cent amid a rising oil output and a gradual easing in the transportation glut in North America.

​However, market participants say oil prices could have risen much higher due to the complexity and ferocity of the ongoing Middle East tensions. Crude only posted modest gains, partially offset by the ongoing expansion of US exports, a diversification in global supply routes, as well as improvements in fuel efficiency worldwide, and the widening use of other sources of energy.

"What I find amazing is that oil has become a broken barometer for the Mideast conflict. A few years ago, you could almost gauge how serious a security crisis was because of the oil price," Helima Croft of the Royal Bank of Canada says.

Experts say the global demand for oil is falling, not least due to slowing economic growth in China – one of the world's largest net importers of energy – and in the Eurozone.

Additionally, the US is becoming increasingly self-sufficient in terms of energy, although it still imports several million barrels per day (B/D) while at the same time shipping its oil and gas abroad.

​Meanwhile, the UK is considering a response to Iran's actions, with some observers concerned about additional military deployments to the Persian Gulf region, which, along with the heated rhetoric on both sides, could put upward pressure on transportation and insurance costs for tanker operators.

"Falling global demand and rising US stockpiles have helped turn oil charts very bearish, but that may not last as tensions remain high in the Persian Gulf," says Edward Moya of the New York-based OANDA.

At the same time, Libyan National Oil Corporation (NOC) said Saturday extraction at its largest oilfield El Sharara had been shut down a day prior. El Sharara contributes roughly 290,000 (B/D) The exact reason behind the shutdown remains uncertain, but some say military clashes and the tense security situation in Libya may have contributed to that decision.

​For its part, Saudi Arabia said its oil exports have fallen to their 18-month lows, in part due to the OPEC agreement to cut production to support oil prices amid faltering demand.

Economists believe the oil price outlook will be revised upward over the coming days, as all the factors restraining the global supply aren't expected to dissipate anytime soon.

"Given all the bullish news we’ve had, the flat price has hardly changed," Janelle Matharoo of InsideOut Advisors said. "Fifteen years ago, this kind of news would have shifted the price by $20 to $30 per barrel."

However, the expected rise in oil prices has also encouraged the expectations of higher oil-producer revenues, including individual companies and entire nations. Over recent days, many oil-drillers have experienced an influx of speculative capital, which could potentially boost their ability to expand the extraction and shipments in areas not affected by conflict.

Oil prices remain highly volatile, and many experts agree – there are equal chances energy prices could post substantial gains or losses moving forward.