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Ideas & Debate

Why oil prices remain stable despite Middle East turmoil

Oil prices only experienced a brief blip from $66 per barrel on January 1
Oil prices only experienced a brief blip from $66 per barrel on January 1 to nearly $70 and then quickly back down to $65. FILE PHOTO | NMG 

In the past fortnight, we have witnessed a flurry of high pitched political and military happenings in the Middle East involving USA, Iran and Iraq. Although these events had the potential of escalating into major regional disturbances, oil prices only experienced a brief blip from $66 per barrel on January 1 to nearly $70 and then quickly back down to $65. This is an indication that the overall oil supply/demand fundamentals are resilient to the ongoing political happenings in the Middle East.

Leading up to the end of 2019, prolonged public demonstrations in Iraq cities (aimed at changing Iraq governance systems and leadership) were the only major regional concerns. These internal Iraq events had threatened to destabilise oil production in Iraq, a country that is currently producing over 4 million barrels per day (bpd). Foreign investors in Iraq were already withdrawing their personnel from Iraq oilfields.

Then in the New Year 2020, and out of the blue, a series of evidently miscalculated incidents and retaliations occurred and these threatened a full flare up of hostilities in the Middle East. A US contractor had been killed by an Iraq para-military group associated with Iran, and this prompted a US retaliatory strike which killed a number of Iraqis. This led to a violent siege of the US embassy in Baghdad by groups said to be aligned with Iran.

As the embassy protests ebbed, US drones killed a very senior Iranian General near Baghdad airport, and this prompted massive demonstrations in both Iran and Iraq. Then Iran vowed retaliations which they made good by firing missiles into an Iraqi airbase that houses American troops with the US confirming zero casualties. This is when the Iranians accidentally shot down a Ukrainian civilian aircraft taking off from Tehran Airport killing about 170 passengers.

Iranian admission of a major error in shooting down the civilian airplane was an embarrassing anti-climax, and this may have humbled the Iranians into de-escalating hostilities, with the US similarly calming down. And as a result, the oil prices are back to their initial levels, at least for the time being. However, no one can say with certainty what will evolve in Iran and Iraq as internal unrest persists in both countries with potential for further flare-ups.

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The Iraq/Iran location of these recent hostilities is different from last year disturbances which had their locus in the Arabian (Persian) Gulf shipping routes, and also Saudi oil production facilities. This time around, Saudi Arabia has been overly cautious and absent from the hostilities, aware of potential economic impacts on Saudi Arabia, especially on the value of the ongoing Saudi Armco IPO.

Many have asked why the US is very obsessed with the Middle East and Iran in particular, to the point of risking another war. It cannot be energy security because unlike in the past USA is today less dependent on the Middle East with US oil and gas production now exceeding its demands. USA has recently become the top world oil producer ahead of Russia and Saudi Arabia

But the need to maintain global political and military balance may be a more compelling reason for US persistence in the Middle East. In recent days an apparent military and economic grouping between Russia, China and Iran has been forming. The third reason may be USA commitment to protect Israel from potential threats from its Middle East adversaries, especially Iran and its nuclear ambitions.

USA and Iran have been foes since 1979 when the Shah (a staunch friend of USA) was deposed by the Ayatollah Khomeini followed by the taking of US hostages by Iran and subsequent cutting of economic and diplomatic ties between the two countries which have remained so to this day.

All said and done, unless a new Middle East disturbance physically and significantly reduces oil production, or a physical blockage of oil supply routes occurs, global oil supplies and prices will remain stable as the market is currently over-stocked, and demands remain subdued by slow global economies. Brent oil prices are therefore likely to remain around $65 per barrel.

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