The two oil shocks that brought the global economy to its knees in the 1970s originated in the Middle East, and investors have been worried every time the region has flared up since then.
But things have evolved well. This time, despite the most delicate geopolitical situation, oil prices are moving relatively little and remain at levels similar to those at the beginning of the month. How do you explain it?
An environment conducive to soaring prices
At present, a whole series of factors increase the probability of a surge in oil prices. First, there are the extreme tensions in the Middle East, with direct attacks between Iran and Israel; they fear that the entire region will burn down and Iran will close the Strait of Hormuz, through which about 20 million barrels of oil and derivatives pass every day, or about 1/5th of world production.
There is also the fact that Russia, one of the largest producers on the planet, is now being sidelined by Western sanctions, which weigh on both its ability to produce oil and its ability to export it.
OPEC promotes production limits to stabilise prices at high levels. Finally, the fundamental trend created by ESG standards weighs on the energy sector and its ability to finance the investment necessary to ensure the sustainability of current production capacities and develop new ones.
The United States helps markets
The relative calm in the black gold markets may surprise in the face of many supply-side threats. But important factors are at work here, too. Among them is the role played by the United States.
During the two oil shocks of the 1970s, the country was a significant importer of black gold from the Gulf countries.
The world’s largest consumer imported about 2/3 of the oil it consumed, and the region's countries were among its leading suppliers. The advent of shale gas and oil has fundamentally changed the situation. The latter plays a stabilising role in the markets.
Quick to set up, its production increases when crude prices soar. This rapidly increases supply, bringing prices back to correct levels. Thanks to the breakthrough in production, the United States is now a net exporter of black gold. Indeed, they still import oil. But they export more. This makes the world’s largest economy less dependent on Middle Eastern production - which barely accounts for 10% of US imports - and even allows the country to retreat.
When President Biden intends to make energy and fuel prices acceptable to improve his re-election chances, he is trying to stimulate his local production. As for the bulk of US imports, they now come from neighbouring Canada, a close and stable source of supply.
The United States also intervenes at the political level. If they are now less concerned by the events in the Middle East, we must face the facts: the global energy market and a possible surge in crude oil prices are reflected everywhere. In an election year, Washington is, therefore, taking special care to prevent the current conflict between Israel and Iran from becoming more significant.
But not only
In addition, the primary source of demand growth in recent years is slowing. China was responsible for most of the increase in demand for black gold in 2023. However, the gradual slowdown of its economy and the rapid transition to electric vehicles (more than 10 million EVs are expected to be sold in China in 2024, or 45% of auto sales) means that China’s appetite for gold is growing slower than in the past. And since the global economy still suffers from high interest rates, global demand will grow slower in 2024 and 2025.
On the supply side, the changes are not that dramatic. Although Russia no longer exports oil to the West, it has found alternative markets, including China and India. These two Asian powers import Russian oil at low prices and, therefore, buy less oil from elsewhere. Russian production thus remains present in the markets.
While it is true that OPEC is limiting its production, it is also true that its share of the world market is decreasing, no longer exceeding 27% of the total. On the one hand, new players are entering this market, such as Guyana, whose production is growing very fast. On the other hand, OPEC has witnessed the departure of some of its members in recent years. In early 2024, it was Angola. And this is not an isolated case. Ecuador left the organisation in 2020, Qatar in 2019, and Indonesia in 2016. This reduces its weight on the global scale and makes it dependent on ad hoc agreements with Russia (which is not a member of the organisation).
The fundamentals of the oil market are clear. Given the relatively bleak outlook of the global economy and the slowdown in Chinese demand due to the economic downturn and energy transition to no load, demand for black gold is growing at a slower pace than in the past. At the same time, on the supply side, US oil production has risen sharply, and new players are entering the scene. Therefore, OPEC had to agree to limit its production to support prices at levels that it considers correct. So, this market was looking for a new balance, and prices were stabilised, which seemed unlikely to go up for now.
Geopolitical conflicts have changed the situation, adding a great deal of uncertainty. First, there was the conflict in Ukraine and the West’s decision to do without Russian oil. And then the conflict between Israel on the one hand, and Palestine and Iran on the other, which raise fears of a fire throughout the region. Taken together, these two conflicts put the oil market on alert.
Nevertheless, in an election year in the United States, the White House will likely do everything possible to calm the game and ensure American consumer fuel prices are acceptable. The rest of the world will undoubtedly benefit.
We, therefore, believe that barrel prices will remain stable at current levels, which ultimately helps everyone unless a new shock impacts prices.