The sharp escalation of the conflict in the Middle East has not caused a significant spike in global oil prices. After a week of continuous growth, prices corrected and failed to hold at even $80 per barrel, although just a year ago experts predicted that the first exchanges of fire between Israel and Iran would push prices up to $150.
The weak reaction of the oil market is partly due to the participants' belief that Israel will give a restrained response to Iranian shelling and will not target Iran's oil infrastructure. Another reason for the end of the rally was that Chinese authorities, contrary to expectations, did not announce new measures to support their economy. This fuelled pessimism among market players: oil supply is rising, while demand remains stagnant. According to experts, even a serious war in the Middle East involving Iran may only briefly push Brent prices to $100 per barrel.
This episode once again raises the question about the viability of the OPEC+ deal. The supply cuts by its members are not yielding the expected effect, where price increases would more than offset the losses from reduced volumes. At the same time, the share of deal participants in the oil market is shrinking.
Saudi Arabia has already begun adjusting its expectations and economic plans, anticipating a period of lower oil prices. The Russian government is also preparing for this scenario, but not by cutting expenditures – instead, they are shifting the burden onto businesses and the population. The reduction in oil revenues will impact the Russian economy as early as 2025 and will force the government to make a tough choice between reducing spending or printing more money in 2026.
A significant escalation of the conflict in the Middle East has so far not led to a sharp increase in oil prices, nor has it restored them to levels seen at the end of last year and the beginning of this year. In the first week of October, the price of a barrel of Brent oil surged by almost 15%, but it failed to hold at the $80 mark. Bloomberg notes that this rise was mainly driven by speculative activity.
The sharp upward rebound in prices was triggered by fears that Israel might strike Iran's oil industry. According to The Wall Street Journal, on the eve of Iran's large-scale missile attack on Israel on 1 October, Israeli authorities warned Tehran that they could target Iran's oil and nuclear facilities in response. US President Joe Biden, when questioned by journalists, essentially confirmed the existence of such a plan but hinted that the US was trying to persuade its partner to delay its implementation. Biden’s administration is concerned about rising gasoline prices in the US right before the presidential election, Politico explains.
According to the International Energy Agency (IEA), Iran has been producing 3.4 million barrels of oil per day in recent months (about 3% of global output), with half to two-thirds of that being exported. While this is a significant amount, analysts interviewed by Reuters note that even if Iran’s oil were completely removed from the market, OPEC+ partners could easily compensate for it. For instance, Saudi Arabia could increase production by 3 million barrels per day, and the UAE by 1.4 million barrels per day. A shortage might only occur if the military conflict spreads to these two countries or if tanker traffic through the Strait of Hormuz – which handles up to 30% of global oil supplies, according to IEA estimates – is disrupted. However, even in such a scenario, Saudi Arabia and the UAE could export some of their oil via pipelines. According to the US Energy Information Administration, Saudi Aramco can temporarily increase the East-West pipeline’s capacity from 5 to 7 million barrels per day.
In any case, the market has reacted weakly to the Middle Eastern escalation. A year ago, when assessing the potential consequences of an Arab-Israeli conflict escalation following a terrorist attack by Hamas, experts predicted that the first mutual strikes between Israel and Iran could push Brent oil prices above $150 per barrel, causing a global recession. Today, experts surveyed by Politico believe that in the event of a major war involving Iran, Brent prices might only rise to around $100 per barrel. (In such a scenario, the cost of gasoline in the US would range from $3.5 to $4.5 per gallon, close to last year’s average of $3.7 and significantly lower than the $5 per gallon seen in the early months of Russia’s invasion of Ukraine in 2022. This would be an unpleasant but not catastrophic scenario for Biden and Harris’s team.)
Notably, a key factor that ended the brief oil rally was the news that the Chinese State Committee for Development and Reform (China’s state planning agency) did not announce new economic stimulus measures, contrary to expectations. Weak demand from China continues to be a major factor affecting global oil prices (→ Re:Russia: Chinese Correction), even amid the military crisis in the Middle East. This highlights a shift in the relative importance of key factors driving oil price dynamics.
The OPEC+ agreement, first signed in 2016, aimed to curb excess supply and maintain prices at a level comfortable for its participants. However, non-OPEC+ countries continued to increase production, reducing the market share of OPEC+ nations. Additional voluntary production cuts agreed upon by Saudi Arabia, Russia, and their partners have not been able to push Brent prices back to the $100 per barrel level (→ Re:Russia: OPEC Minus). This casts doubt on the strategy's rationale and has heightened tensions among the cartel's members. According to The Wall Street Journal, last week Saudi Arabia's Energy Minister, Prince Abdulaziz bin Salman, informally stated that if 'violators' (primarily referring to Iraq and Kazakhstan, according to journalists) do not start adhering to quotas, oil prices could drop to $50 per barrel (OPEC later denied this statement).
The scenario of a complete breakdown of the OPEC+ deal and an all-out price war, in which Saudi Arabia increases production from the current 9 million barrels per day to a maximum of 12.5 million, and other countries follow suit, could lead to oil prices falling below $50 per barrel, predicts Bloomberg columnist Javier Blas. However, Blas considers this scenario highly unlikely because the consequences of such a price war would be too difficult to predict. He also finds a scenario where prices return to the $80-100 range unrealistic, as it would require demand growth that current global economic trends do not suggest. Most likely, only part of the production restrictions will be lifted. As a result, according to Blas’s forecast, oil prices will be significantly closer to $50 than to $100.
While Russia is counting on continued significant economic growth (→ Re:Russia: The Non-Victory Budget) and continues to increase government spending, budgeting for oil at around $60 per barrel, Saudi Arabia has begun reviewing and cancelling costly projects to save money, including the $1.5 trillion 'city of the future' Neom project in the desert. This week, Saudi Arabia sharply revised its 2024 GDP growth forecast from 4.4% to 0.8%. The Saudi budget deficit, initially calculated based on oil at $90 per barrel (according to Fitch, as cited by Bloomberg), is now expected to reach 2.9% of GDP ($31.5 billion) instead of the previously anticipated 1.9%.
The Russian government is preparing for a decline in oil revenues by increasing the tax burden on the economy. As we previously mentioned (→ Re:Russia: Chinese Correction), a scenario where oil prices drop to $60 per barrel or even slightly lower will not create serious budget problems in the near term, but it will increase turbulence in the Russian economy, which is already under pressure from international sanctions. In particular, it will make imports, which play a crucial role in balancing the domestic market, less accessible. Additionally, such a scenario will force the Russian government to consider cutting expenditures in 2026, presenting a significant political challenge. An attempt to balance the situation through monetary issuance would push inflation to a new level.