What’s behind this unexpected market calm in the face of growing regional conflict? The CSIS Energy Security and Climate Program turned to leading experts for insights. In the following essays, they delve into the factors keeping oil prices in check, discuss scenarios that could disrupt markets, and examine how the widening conflict might impact global liquified natural gas (LNG) supplies.
Supply Risk Rises Again
Kevin Book, Senior Adviser (Non-resident), Energy Security and Climate Change Program
For months, oil markets did not seem to be pricing in the prospect that Israel’s multifront battle against Iran and its regional proxies might disrupt global supplies. The front-month Brent crude futures price had fallen about 20 percent, from roughly $90 per barrel (bbl) when Tehran and Tel Aviv last confronted one another directly in mid-April, to a little less than $72/bbl at the end of September. Last week, however, Brent surged approximately 10 percent or a little more than $7/bbl, and on Monday it reached an intraday peak north of $81/bbl. Traders appeared to be factoring in strikes on Iranian petroleum infrastructure.
Even in an age of generative artificial intelligence, oil price estimates remain far from an exact science, and the impacts of supply disruptions can depend significantly on scope and duration. Back-of-the-envelope estimates by ClearView Energy Partners, LLC, gauged broad new sanctions (or strict enforcement of existing ones) at up to a roughly $7/bbl impact; attacks on Iran’s principal export facility at Kharg Island at up to around $13/bbl; and a three-to-seven-day retaliatory Iranian blockade of the Strait of Hormuz between $13/bbl and $28/bbl.
Alternatively, Israel might opt to target the Islamic Republic’s refinery capacity. In theory, doing so could curtail finished fuels within Iran without significantly diminishing global crude supplies, and Iran would temporarily return to its past reliance on refined products imports. However, Iran could still subsequently retaliate against regional transportation and production. And even if Israel and its allies successfully deflected most of last week’s inbound projectiles, Arab Gulf producers are unlikely to have comparable defenses to shelter upstream, midstream, and downstream assets.
Israel could pick other targets. Secretary of State Antony Blinken assessed in July that Iran was only one or two weeks from a “breakout” toward a weapon. However, an Israeli strike against Iranian nuclear sites could lead to similar retaliatory consequences for regional production. Moreover, a significant Israeli response might lead Iran’s ruling mullahs to conclude they cannot protect national security without a nuclear weapon. As such, escalatory prospects, and concomitant risks to regional production and transportation, could persist even if acute tensions recede.
Why the Market Is Still Not Panicking
Ben Cahill, Senior Associate (Non-resident), Energy Security and Climate Change Program
Last week’s Iranian missile attacks—and muddled White House comments on potential Israeli strikes on Iranian oil infrastructure—produced the sharpest oil price rise in two years. Yet even in this febrile environment, the market is not panicking. Three factors help explain why.
First, this is a well-supplied market with a big buffer. The Organization of the Petroleum Exporting Countries and allied producers (OPEC+) has made several group-wide and voluntary production cuts in the past two years. But the group has struggled to bring those barrels back onto the market, thanks to a combination of weaker oil demand, especially in China, and robust non-OPEC+ supply. OPEC+ recently delayed a planned output increase for October until at least December, and 2025 does not look much better for market balances. As a result, the International Energy Agency estimates that OPEC+ has more than 5 million barrels per day (Mb/d) of spare capacity.
