Michael Rubin, a Senior Fellow at the American Enterprise Institute (AEI), outlined that a broader conflict in the Middle East “is growing likelier”. “Look, the collective policy of the United States, Europe, and the UN has for decades been to kick the can down the road,” he said.

“Eventually the road runs out. Did anyone really think that Hezbollah, Hamas, and the Houthis were arming themselves with ever-more sophisticated missiles and drones because they wanted them as backdrops for a parade?” he added.

And what would a broader conflict in the Middle East mean for oil prices?

“There would be a spike,” Rubin sid, “perhaps as high as $200 per barrel,” he added.

 

“Throw civil war in Venezuela into the mix, and maybe $250 per barrel,” he continued. “But markets adjust. Demand reduces. Plus, the Middle East no longer has the monopoly over oil and gas it once did. There’s fracking, Nigeria, Alberta. offshore U.S., and many more locations that can help blunt the impact, even in the short-term, should governments choose to allow them to do so,” Rubin went on to state.

Maritime intelligence company Dryad Global advised its clients that the past two weeks have seen an unprecedented sequence of escalatory events that have the potential to lead to a major flare-up in the Middle East.“This sequence of escalatory events will likely lead to retaliatory attacks on Israeli territory and assets in the coming days,” Dryad warned.

“It is assessed that these are highly likely to impact commercial shipping through increased Houthi airstrikes on merchant vessels in the Red Sea, Gulf of Aden, and Arabian Sea, as well as IRGCN seizures of merchant vessels in the Persian Gulf and Gulf of Oman,” it added.

The company noted that “in line with this heightened risk”, it advises against “all transit of Israeli-linked vessels within the Red Sea, Gulf of Aden, Gulf of Oman, and the Persian Gulf until further notice”.

Matthey Bey, a senior analyst at RANE, told Rigzone that Iran and Hezbollah “will almost certainly retaliate in some form to the two … assassinations in recent days” and added that the scale could approach the size of Iran’s attack on Israel in April.

“The scale and manner of any Israeli retaliation will likely be dependent on the scale of Iran and its allies’ attack on Israel and whether or not there is significant damage or casualties.”

Bey said any escalation in the conflict would add a few dollars to oil prices as a risk premium, a conflict in Lebanon would not necessarily directly affect the Middle East’s oil and gas production located in countries like Iraq and Saudi Arabia, which he said means there may not be a change in the long-term oil supply and demand balance.

“However, if the United States gets involved and does so through deploying military assets based in Gulf Cooperation Council countries, Iran and its proxies could return to targeting GCC oil and gas infrastructure, which may have a more significant impact on the physical supply of oil if a crucial node is hit as was the case in the 2019 attack on the Abqaiq oil processing facility,” he said.

“With the exception of potential Hezbollah strikes targeting Israeli gas production and processing facilities, Iran and its allies’ initial round of retaliation is unlikely to target oil and gas production throughout the region,” he added.

“Prices would initially rise sharply if this conflict occurred, and then move towards a level that retains a higher risk premium but nearer the level that reflected actual (if any) changes in oil production or flows,” he said.

Josephine Mills, an Analyst at Enverus Intelligence Research confirmed that the Middle East produces over 20 percent of the world’s oil production and warned that any disruption to this production and/or ability to export crude to market would result in an increase to oil prices. “Iran alone contributes ~3.4 million barrels per day. If even just 15 percent of their production was impacted it would increase our 2H24 price forecast by ~$3,” Mills added.

Compared to other asset classes, the oil price has been more susceptible to geopolitical events.

That’s what analysts at Moody’s Ratings said in a new Moody’s report which looked at the short and long-term reaction of financial markets to “different shocks” since 2001, “to better understand some of the credit effects of geopolitical events”.

The analysts pointed out in the report that the oil price has been more susceptible to geopolitical events “because of, among other reasons: one, the global economy’s dependence on oil; and two, concentrated proven oil reserves in regions that are often subject to political instability, conflicts, or sanctions (such as Russia, Venezuela, or Middle Eastern nations)”.

Moody’s analysts highlighted in the report that 11 out of 15 shocks in their study involved major oil-producing regions.

The analysts also noted in the report that the direction and size of impact varied depending upon the event’s influence on underlying fundamentals.

“The direction depends on whether markets perceive events as potentially disrupting supply (driving prices upwards) or casting a shadow on global economic activity and oil demand (driving them down),” they added.

“It is possible that these drivers are triggered at the same time, and sometimes with one as the dominant influence,” they continued.

“For example, tension between U.S.-Iran in the early-2020 raised oil supply concerns, which should have pushed prices higher. But it coincided with the pandemic that ruptured global demand for oil, leaving prices to drop by almost 40 percent during the first half of 2020,” they went on to state.

The analysts outlined in the report that the countries involved in a conflict, and their share in global oil supply and demand, “influence the size of the impact”.

“For example, events affecting large oil producers such as Russia or Middle Eastern nations have caused significant oil price increases due to supply worries,” the analysts said.

“By contrast, events involving major oil consumers, like the U.S. and Europe, oil prices trended down on account of future demand concerns (e.g., fall in prices after the 9/11 terrorist attacks),” they added.

“Similarly, oil price volatility spiked higher during the first 30 days of geopolitical events involving major oil producers or consumers,” they continued.

Moody’s analysts revealed in the report that, “like other asset classes, the impact on oil price gradually settled down from its peak impact in most cases over the short-term”.

“Considering the … example of [the] Russia-Ukraine war – which drove oil prices to high levels in early-2022 – prices normalized back to pre-event levels by mid-2022,” they said.

“The correction occurred as the anticipated disruption to the supply of Russian crude did not materialize. Russian crude exports post-sanctions were just rerouted maintaining its share of global supply. Also, rising supply from non-OPEC countries (mainly the U.S.) and a slowdown in global economic growth from the post-pandemic recovery weighed on oil prices,” they added.

Lately, changing dynamics in the oil industry – such as rising share of non-OPEC in global production, excess production capacity with OPEC, availability of global oil inventories – has somewhat toned down the severity of impact during shocks, Moody’s analysts stated in the report.

The analysts warned in the report that any further escalation in the Middle East or the Russia-Ukraine war, or a major disruption to key trade routes (e.g., the Strait of Hormuz or the Red Sea), poses risks of higher oil prices.

Conversely, the escalation of tensions between Mainland China and Taiwan into a full-blown conflict or structural threats to Chinese economic growth pose risks of falling prices, the analysts noted.

 George Khoury, the Global Head of Education and Research at CFI, highlighted that the oil market reacted to developments in the Middle East and warned that “risks of a broader conflict seem to be increasing”.

“This threatens to disrupt oil supplies and supply routes and could lead to higher prices still,” Khoury said.

“The recent increase in the crude oil price premium reflects the market’s worries that Iran might become more directly involved in the conflict, potentially threatening the Strait of Hormuz, a key route for global oil transport,” he added.

“Additionally, the decline of crude oil stockpiles in the U.S. also contributed to support oil prices as traders hope for a stronger demand in the United States,” he continued.

Khoury noted in the statement that crude markets could also benefit from softer monetary policies in the U.S. and elsewhere in the coming months. “Lower interest rates could help support major economies and push oil demand to the upside. However, the trend of oil prices could depend on the pace of economic growth in China which has been slowing more than expected,” he added.

JPM Commodities Research team, J.P. Morgan analysts said “oil prices recouped some of the losses on Wednesday, as the killing of a Hamas leader in Iran ratcheted up tensions in the Middle East, but remain at the lowest level since the beginning of June amid market uncertainty around the changing U.S. election narrative and broader macro risk off”. “Physical indicators are also reflecting some deterioration in the fundamentals. The backwardation in the Brent and WTI structures softened in recent sessions, with key timespreads across all tenors the weakest since early-to-mid June. Regional crude prices and differentials have also eased,” the analysts added. In the note, the J.P. Morgan analysts warned that the market remains volatile. “Brent oil was trading below $80 in early June, rose to almost $90 in early July, before falling to the high $70s on July 30,” they pointed out. “Amid this volatility in spot prices, our fair value model remains remarkably stable. The pricing model continues to project Brent’s July’s fair value at $84 (it realized $83.88), and that the price in September would hover at close to $90,” they added. “For the year, the model still shows that Brent would average $83 per barrel (year to date Brent traded at $83.49), and places December 2025 at $63 (published price $64). This stability is even more remarkable, given that our price forecast has not changed since June 2023,” they continued.

The analysts warned in the report that the main hurdle to $90 “remains the misplaced (in our view) doubts about the health of global demand and market’s fixation on a fundamentally weak 2H25”.

“Furthermore, the most important market consequence of a U.S. election that has become more competitive, is a big increase in uncertainty around the outcome,” they added. A victory by the incumbent Democratic party is the most market-neutral scenario, while implications of another Trump presidency could be net bearish for oil as the return of a ‘maximum pressure’ campaign on Iran is ultimately undercut by the negative macro impacts of rising trade tariffs,” they continued. “Consequently, sequencing of policy priorities would become much more important under a Trump 2.0,” they went on to state.

In a report sent to Rigzone late Tuesday by Standard Chartered Bank Commodities Research Head Paul Horsnell, analysts at the company, including Horsnell, revealed that Standard Chartered’s machine learning oil price model, SCORPIO, is predicting its biggest ever week on week loss.

“For Brent settlement on 5 August, SCORPIO is indicating a week on week fall of $2.86 per barrel, the largest week on week decline it has indicated in the 18 months it has been running,” the analysts stated in the report.

“SCORPIO attributes $1.11 per barrel of that fall to a variety of technical indicators. We think that if SCORPIO is picking up an outsized negative contribution from technicals, it is likely that most of the Commodity Trading Advisor (CTA) black boxes are sellers at the moment,” they added.

“Add the CTA black-box effect to a seasonally quiet late-July/early-August market with relatively low-liquidity and an absence of fundamentally driven oil traders prepared to take on risk right now, and the stage is set for a short-term environment in which algorithms are likely to be more than usually dominant,” they went on to state.

In the report, the Standard Chartered analysts said oil prices have weakened significantly, highlighting that front-month Brent reached a seven-week low of $78.43 per barrel in early trading on July 30.

“The contract settled at $79.78 per barrel on 29 July, a week on week fall of $2.62 per barrel and the first sub-$80 per barrel settlement since 7 June,” the analysts stated in the report.

“We think the renewed slide is primarily due to low seasonal liquidity combined with extremely negative market technicals and a sudden worsening of sentiment across the commodity complex,” they added.

The analysts noted in the report that they do not think the weakness is due to poor fundamental oil data.

“The latest Energy Information Administration (EIA) weekly data was the most bullish in over a year … While recent global balances have been weaker than we had expected, the resultant monthly stockdraws for late Q2 and Q3 are still a hefty 1.5 million barrels per day,” they said.

“While these draws are around 0.5 million barrels per day less than our prior expectation, the gap would not usually be considered large enough to move the needle for prices significantly; and most particularly it would not be expected to cause the $9 per barrel price slide of the past three weeks,” they added.

The Standard Chartered analysts pointed out in the report that not all current technicals are necessarily negative.

“Perhaps the most powerful in terms of their current influence are triangle patterns based on declining ranges,” they said.

“While most technical traders would currently lean towards the view that those patterns herald a sharp move lower, should some key resistance levels hold the triangles could (on a technical basis) set the market up for a significant break higher,” they added.

“For those traders using a more mixed strategy, we have found few who believe sub-$80 per barrel Brent can be sustained on a fundamental basis, but we believe the same traders are almost unanimous in the view that seasonal and technical market dynamics could still cause a temporary severe downwards move,” they continued.

In the report, Standard Chartered forecasts that the ICE Brent nearby future price will average $106 per barrel in the fourth quarter.

A Bofa Global Research report sent to Rigzone this week noted that “oil’s Bermuda triangle is nearing an end”.

“Oil prices have been trading in a narrowing range, or a triangle pattern, for over a year now,” the report stated, adding that a triangle pattern is technically synonymous with a compressed coil or spring.

“When it becomes too tight and what’s holding it lets go, a sharp and sudden breakout trend occurs,” the report noted.

In an oil and gas note sent to Rigzone on Tuesday, Macquarie strategists outlined that oil was “falling on macro and technicals” and warned that fundamentals are “set to drive further downside”.

“Despite the recent pullback, it would not surprise us if prices find support from summer draws through the end of August before beginning a multi-month pullback due to large 4Q24 surpluses,” the strategists stated in the note.

“That said, the odds may be increasing that the market is looking past the remainder of the summer and beginning to price large surpluses from 4Q24 through 2Q25,” they added.

“Key drivers of our surplus balances are accelerating OPEC+ and U.S. supply growth starting in October, weak diesel and softening jet fuel demand growth, and a larger than normal fall T/A season,” they continued.

In the note, the Macquarie strategists said crude is “now below the 200D moving average due increasing global macro and demand concerns”.

“Concurrently, positioning for crude has become increasingly bearish with managed money length falling by a combined 73k contracts for WTI and Brent,” they added.

“We believe recent liquidation is being driven by macro and algorithmic flows as demand from China, the world’s largest crude importer, posted its slowest economic growth in five quarters,” they went on to state.

The strategists also stated in the note that, alongside a weakening demand growth picture, physical Brent has also softened.

“Dated versus ICE Brent fell by $1.52 per barrel over the last two weeks,” they added.

“The reduction in physical tightness is partially attributed to increased U.S. exports into NWE in July as MEH’s premium to WTI improved. WTI cargo resales by Dangote have also softened global sweet balances,” they continued.

Macquarie’s strategists highlighted in the report that both WTI and Brent speculative net length fell over the previous week.

“WTI net length dropping by 21.7K while Brent decreased 21.2K,” they said.

“WTI spec net length retreated driven by over nine times the decrease in longs as drop in shorts. Brent recorded a slightly smaller move with over six times the amount of long liquidation than short covering,” they added.

“Lastly, commercial participants increased length for both WTI and Brent, totaling 35K contracts,” they continued.

To contact the author, email andreas.exarheas@rigzone.com