Israel attacked Iran earlier this month, causing a brief spike in global crude oil prices that quickly subsided.
- Prices hit $80 per barrel at their peak, lower than January levels.
- Iran did not block the Strait of Hormuz or interfere with oil trade, leading prices to drop swiftly.
- Crude oil prices are now lower than before the attack.
Why it matters: The oil market has shown resilience to geopolitical shocks that historically would have sent prices skyrocketing.
Several factors contribute to the current stability in oil prices:
- Iran has not targeted oil supplies, partly due to the economic pain it would cause itself.
- Oil traders have learned to be cautious about price spikes from past experiences.
- Seasonal demand changes, with autumn typically seeing reduced oil demand.
- An oversupplied market, with robust supply and slow demand growth.
- The U.S. is now the world’s largest oil producer, lessening global dependence on Middle Eastern oil.
The Strait of Hormuz is a vital maritime corridor, with about 20% of global oil and gas flowing through it.
- The strait is bounded by Iran, Oman, and the UAE, and connects the Gulf with the Arabian Sea.
- It is deep enough for the world’s biggest crude oil tankers.
- In the first half of 2023, around 20 million barrels of oil passed through daily.
The impact: Closing the strait would have devastating economic impacts, driving up oil prices and disrupting global markets.
While Iran’s parliament approved a motion to close the Strait of Hormuz, experts suggest Iran has “little to gain and too much to lose” by blocking it.
- Iran risks turning oil-producing neighbors against it and provoking a negative response from key markets like China.
- The U.S. and allies could potentially re-establish maritime traffic through military means.
Gulf oil exporters have developed alternative routes, but their capacity is limited compared to the strait.
Oil prices pared back losses after a sharp fall triggered by Donald Trump’s declaration of a ceasefire between Israel and Iran.
- Doubts arose when Iranian media denied the ceasefire’s existence and Israel said it would respond “forcefully” if necessary.
- Financial markets were buoyed by the news, with stock markets rising in Europe and Asia.
- Airline and travel stocks rose, while oil stocks took a hit.
What’s next: Lower oil prices are essential to control inflation, a factor the U.S. Federal Reserve will consider when deciding on interest rates in July.
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