Oil started trading this week on a shaky note. By all accounts, traders appear to believe that there is currently no immediate danger of an escalation in the Middle East conflict between Iran and Israel. As a result, WTI futures reached levels just above $80 per barrel on Monday.
For the global economy, lower oil prices are favorable. For Saudi Arabia, however, the drop in prices is bad news, as the country’s budget is based on prices close to $100.
According to many market participants, the current situation internationally does not suggest oil prices of $100. Because there is currently an easing of relations between Iran and Israel to the old frameworks of confrontation.
At the same time, economic concerns negatively affect prices. US gross domestic product data is expected this week. At the moment, there are expectations for a movement in the downward direction of the growth of the US GDP from 3.4% to 2.5%. The Federal Reserve’s lukewarm stance on future rate cuts is also putting pressure on markets.
Possible blocking of the Strait of Hormuz
Although the situation between Israel and Iran is currently calm, the danger of future escalation of the conflict is very real. And investors’ concerns are related to the potential blocking of the Strait of Hormuz, which is under the control of Iran.
If tensions between the two countries rise and lead to a military confrontation, this will almost certainly increase oil prices, as well as the price of gas.
This is precisely the reason for the numerous calls from Western leaders for restraint. Efforts to de-escalate tensions will help avoid a drastic spike in the prices of energy commodities. Because nearly 20% of crude oil passes through the Strait of Hormuz (21 million barrels of oil per day). In case of closure, finding an alternative route for these volumes it would be almost impossible.
Although the threat of Iran closing the strait has loomed for years, such a scenario has not yet materialized. And this is so, since such a measure would also affect Iranian exports. Along this route, the country exports products to China, as well as other Asian countries.
According to some market experts, a possible closure of the strait will also have a strong impact on natural gas prices. For oil from the United Arab Emirates and Saudi Arabia, some alternative delivery route can be found, mainly through the Red Sea. But for LNG, there is no potential new route.
The Strait of Hormuz is a major transport corridor for the produce that Qatar exports. According to data from Vortexa, in 2023 about 80 million tons of natural gas were transported through the strait, which is equal to almost 20% of the total volume worldwide.
Therefore, the closure of the strait could have a much more dramatic effect on gas prices than oil prices.
Source: Benchmark Finance
