Global crude oil prices rose by more than 4% on Wednesday, surging after President Biden told reporters he was “discussing” the question of whether the U.S. would support an Israeli attack on Iranian oil facilities.
“We’re discussing that,” Biden said. “I think that would be a little … anyway.”
The cryptic remark sent oil up significantly – but even so, prices are not particularly high by historical standards.
Brent, the global benchmark for crude, closed at $77.62, still lower than it was for most of 2024.
“In the past, if we're talking about any kind of conflict in the Middle East that concerned Iran, prices would probably be above $100” a barrel, said Amrita Sen, the founder of the energy research firm Energy Aspects. “People were talking about, like, $120, $130 crude.”
Although tensions between Israel and Iran are currently as serious as they have been for decades, said Sen, “the market has been completely brushing it aside.”
Traders say the world has oil to spare
Why are markets so sanguine? The biggest reason, analysts say, is that the OPEC+ alliance could make a lot more oil — if it wanted.
As a group, OPEC+, a coalition of oil-producing countries, has an incentive to make less oil; lower supply means higher prices. But individual countries have a strong incentive to produce more oil, which funds their national budgets. Balancing those two competing motivations is the central diplomatic challenge of the cartel.
And for a few years now, the group – and particularly Saudi Arabia – have cut production significantly, trying to hold up prices. That means OPEC+ could, hypothetically, easily make up for missing Iranian oil.
Rystad Energy, an energy research company, estimates that Iran produces about 4 million barrels of crude per day, and exports about 2 million. OPEC+’s spare capacity – the amount of oil the group could make, but is choosing not to – “currently sits at more than 5 million barrels per day, which could be deployed relatively quickly,” Claudio Galimberti, the chief economist of Rystad Energy, wrote in a research note.
Whether the alliance would choose to deploy that production is another question.
Rebecca Babin, a senior energy trader with CIBC Private Wealth, notes that OPEC+ kept a tight lid on production even after Russia invaded Ukraine and prices spiked. She thinks this time, they’d choose to sell more barrels. Probably.
“Do we know that they will? Nope,” she said. “And they love to make surprises.” But the possibility is helping to keep prices from skyrocketing.
Chinese demand and U.S. production reshape the geopolitics of oil
There are a few other reasons for the lack of alarm.
Oil prices slid dramatically in September, thanks in part to lower-than-expected demand from China’s slowing economy. China has just launched a massive stimulus program, but it’s not yet clear how much that will translate into oil consumption.
Meanwhile, the geopolitics of oil have shifted dramatically, shaped in large part by the shale boom, when new drilling methods like fracking unlocked vast oil reserves. The U.S. is now the largest oil producer in history, and a net oil exporter. (Crude exports have not been affected by the port strike this week on the East and Gulf coasts of the U.S.)
And because the U.S. is far less reliant on oil from the Mideast than it used to be, traders think Iran has less incentive to shut down the Strait of Hormuz than it did a few decades ago.
More than a quarter of the world’s seaborne crude travels through that waterway, which lies between Iran and the United Arab Emirates. Any blockage would cause “runaway” oil prices, Galimberti of Rystad Energy says.
But it would cause less pain to the U.S. than it once would have – and more pain to Iran and its primary customer, China.
Sen thinks markets are currently underestimating how much this conflict could upend markets, and that if an attack on oil infrastructure does happen, the price response will be dramatic. “This is the biggest short the market has ever had,” she said.
Babin thinks the market’s factoring in the risks just about right. After all, oil markets aren’t waving off these risks entirely. Prices are up more than $6 this week, a significant jump. Babin notes in the options market, some traders are placing bets that would only pay off if prices spike more.
But overall, she said, when she looks at the price of oil, “I see this as very measured: a market that's not panicking, not running away with itself. We’re not at $90.”
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