The war in West Asia is escalating, so why aren’t oil prices shooting up?

A wave of pager and walkie-talkie explosions last week rattled the militia’s ranks, took lives, injured many and heralded a cross-border exchange of lethal projectiles that has taken an even larger toll, with hundreds reported killed by Israeli action this week. 

It looks like an attempt by Tel Aviv to neutralize a threat before the US pushes for restraint. These hostilities raise the risk of a flare-up that may draw Tehran directly into battle, even as sea trade routes face Houthi attacks, the Russia-Ukraine war shows no sign of abating and China is seen to be upping the ante in global geopolitics. 

Also read: Oil Falls After Iran Says It’s Prepared to Ease Israel Tensions

Despite all this, the global market for crude oil has retained its composure. Having stayed in a relatively soft zone of around $75 per barrel for months, oil has barely budged since the weekend, with a small gain reported on Tuesday in response to China’s policy stimulus that may firm up demand, coupled with West Asia’s woes and a US hurricane alert that could disrupt supply. 

That another theatre of war opened by Israel has had such a mild impact reveals the power held by the balance of demand and supply.

Consider the scenario. China’s economic slowdown has kept demand weak, and even though it is trying hard to effect a revival, the pace of its move away from fossil fuels could mean it’s unlikely to be the voracious oil guzzler that exporters would like it to be. 

Sure, the rising use of hydrocarbons in other big markets—including America and India—has held up global oil consumption, with 2024 set to record a larger appetite for it than last year, but that force is being outweighed by the other one at play: supply. 

Western sanctions on Russian oil have not acted as a squeeze; tankers full of it (with some in disguise) have found their way to users. But the market’s big stabilizer has been the role of US shale output in loosening the grip of Opec+ on prices. 

Also read: Shale Is Keeping the World Awash With Oil as Conflicts Abound

At one time, this cartel of oil producers could cut production to charge more. But now, as shale broadly turns profitable at prices above an estimated $70-75, firmer prices simply attract more of it to fill that gap. 

Supply from non-Opec+ countries like Canada, Brazil and Guyana has also risen. In 1974, the Middle East used to drill 37% of the world’s oil. This has slipped to 29%, leaving the Saudi Arabia-led cartel with less control and the region’s volatility less of a worry. 

Indeed, Opec+ has had a hard time lately adjusting its oil spigots to achieve its stated price target ($100 per barrel was given up in June), with divisions among its members making it harder for them to act in tandem. 

As cutbacks run the risk of losing market share without revenue gains from stronger prices, the cartel faces a strategic dilemma that’s reflected in its messy record of decisions this year.

All taken into account, the current balance of demand and supply favours soft oil prices, as has been the case for about a year now. Earlier, the Reserve Bank of India had projected crude oil at $85 per barrel this year, but the actual prices and our import bills so far have been even more benign. 

Also read: Global oil markets to tip into surplus by end of decade, IEA says

Yet, low volatility cannot be taken for granted. While Tehran mulls over US conditions for a revival of Iran’s ‘nuclear deal’ that Washington scrapped in 2018, it also appears to have an ear turned to Beijing. Flare-up risks could easily spike.