Oil markets jittery amid ongoing geopolitical tension

During the last couple of weeks, the impact of geopolitics has become more pronounced in oil markets. Following the Houthis attack on a tanker carrying Russian-origin naphtha over the weekend and the killing of three soldiers on a US base in Jordan, the market turned jittery.

Oil traders are aware of how tenuous the situation in the Middle East is and fear further escalation.

As always, oil prices reacted quickly. Brent rose 1.5 percent in early Monday trading. The increase abated some to 0.61 percent for Brent by mid-morning CEST or $84.06 per barrel.

The fact that the tanker that was hit carried product rather than crude calmed the situation a bit. Naphtha is used to produce distillates such as gasoline and plastics, which means that the rise in price has an impact on fewer products than if crude had been affected. Diesel rose 5 percent in Europe

The question that analysts ask themselves is whether the incident will have an effect on Iranian crude exports which currently stand at around 1.5 million barrels per day. Despite sanctions, the US has tolerated the Iranian exports to keep markets supplied.

This brings us to the global demand-supply scenario which is up: the Energy Information Administration revised upward its demand by 881,000 bpd and the International Energy Agency by 380,000 bpd compared to forecasts in January 2023. The Organization of the Petroleum Exporting Countries held its outlook on global demand increase for 2024 constant at 2.25 million barrels a day.

Demand is back, which means that geopolitical tensions have an upward pressure on the price. At the same time, OPEC and its allies, known as OPEC+, undershot their output targets by 907,000 bpd in December 2023, according to S&P Global.

What mitigated both geopolitics and rising demand was extra production by non-OPEC+ members. According to the IEA, oil supply will rise by 1.5 million bpd to 103.5 million bpd in 2024. The Paris-based agency expects the bulk of the increase again to come from countries outside the OPEC+ alliance like the US, Brazil, and Guyana.

Markets are unpredictable at the best of times and organizations such as OPEC+ try to insert a modicum of predictability. However, the vagaries of geopolitical tensions in one of the most important oil-producing regions exacerbate intraday swings, as was proven over the weekend.

Looking back over the last four months since the troubles started, oil is still below its Sept. 27, 2023 high, which was reached a little over a week before hostilities started.

The Houthi attacks in the Bab Al-Mandeb doubtlessly added more uncertainty. Aramco CEO Amin Nasser correctly pointed out that continued dangers in the Bab Al-Mandeb would have an upside pressure given longer journeys and higher shipping costs for tankers being diverted from the Suez Canal around the Horn of Africa. Shippers braving the troubled waters of the Red Sea despite current developments also will face higher insurance costs.

All in all, we should expect higher intraday volatility for the time that the tensions in the Middle East continue. We all hope that hostilities do not spread, which would be in nobody’s interest. Under that assumption, the long-term trend of the oil price will remain a function of supply and demand and OPEC+ will continue to play an important modifying factor.

• Cornelia Meyer is a Ph.D.level macroeconomist, energy expert and CEO of Meyer Resources, a business consultancy.