$100 oil could be the October surprise no one wanted

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CNN
—

There is chaos in the Middle East and there is remarkable calm in the oil market.

Oil prices have risen, but not dramatically, even as the world prepares for all-out war in the world’s most critical energy region.

The cooled reaction in the oil market reflects the “boy who cried at wolves” mindset that has now taken hold.

Investors, plagued by previous geopolitical fears that quickly dissipated, have become numb to the cascade of crises around the world. This time they are waiting for evidence of actual supply disruptions before raising the price of crude oil.

Still, experts warn that there is still a real danger that the looming regional war in the Middle East could lead to a devastating rise in oil prices that could rattle not only the global economy but potentially the U.S. presidential election.

“This will get worse before it gets better. The story of the village boy who cried wolf didn’t end for either the village or the boy, said Bob McNally, president of consulting firm Rapidan Energy Partners.

“It’s hard to overstate how complacent the oil markets have become,” he said.

It’s also hard to overstate how much Americans loathe price spikes at the pump.

Gas prices have fallen — 18 states now average prices below $3 a gallon — but a major conflict in the Middle East could change that.

“This is by far the most important production and export region in the world. It is nothing less than the heart and circulatory system of the global economy,” said McNally, who served as energy adviser to former President George W. Bush.

Oil prices rose just 2.4% on Tuesday after Iran fired hundreds of missiles into Israel. Prices rose only slightly on Wednesday despite Israel announcing retaliatory measures.

At just $70 a barrel, U.S. oil prices remain much closer to their 2024 lows than to their highs last fall of nearly $90.

The muted response underscores ongoing concerns about oversupply, economic woes in China and power struggles within OPEC+, the oil cartel led by Saudi Arabia and Russia.

The market reaction would likely have been much more dramatic two decades ago, before the shale revolution that turned the United States into an energy superpower.

“Before the shale oil revolution, a situation like this would have resulted in prices well above $100,” Helima Croft, global head of commodities strategy at RBC Capital Markets, said in a telephone interview with CNN.

Just two years ago, the price of oil shot up to $130 per barrel after Russia invaded Ukraine in March 2022.

However, this war never caused the major supply disruptions that many feared, and oil prices eventually returned to normal.

The question now is how Israel will decide to retaliate against Iran – and whether that response will disrupt the flow of oil from the region.

It is far too early to say there will be an energy disruption, and U.S. officials will likely do everything they can to avoid one.

President Joe Biden said Wednesday he does not support an Israeli attack on Iranian nuclear facilities.

“There is significant risk that energy facilities and oil flows could be caught up in an escalation between Israel and Iran and its allies,” McNally said.

And how would Iran then react to a direct attack from Israel?

“There are only so many times you can take risks without actually getting into conflict,” said Croft, a former CIA analyst.

Croft said there was a risk that Iran would decide to “internationalize” the costs of the crisis by attacking oil facilities in the region.

Oil prices jumped in 2019 when Saudi oil facilities were damaged in an attack that U.S. officials blamed on Iran.

“This Iranian response could be on steroids in 2019,” Croft said.

Kevin Book, managing director of ClearView Energy Partners, told CNN that he believes the oil market is currently underestimating the risk in the Middle East.

If Israel attacks Iranian energy facilities, global oil prices would likely rise to $86 a barrel from around $74 currently, ClearView told clients this week.

Even though Iran remains under sanctions over its nuclear program, it has still been able to sell its oil on the global market – mainly to China.

One risk is that Iran’s main export facility on Kharg Island will be attacked. That could have a significant impact since it accounts for 90% of Iran’s oil exports, according to ClearView.

According to the International Energy Agency, Iran’s oil exports were a “robust” 1.8 million barrels per day in August.

A loss of this oil would impact energy prices.

In theory, Saudi Arabia and OPEC could make up for the loss of these barrels, although this would take some time.

“With all this talk about the shale revolution, it will once again come down to a call to Riyadh,” said Croft, the RBC analyst.

It is also possible that the Biden administration would respond to a shortfall by releasing emergency supplies from the Strategic Petroleum Reserve. Biden aggressively withdrew oil from the SPR after Russia’s invasion of Ukraine, but it remains the world’s largest emergency oil stockpile.

A greater danger is that Iran could retaliate by cutting off the flow of oil from the Strait of Hormuz, the world’s most critical oil chokepoint.

The canal is only 21 miles wide at its narrowest point. and it is the only way to transport oil from the Persian Gulf to the world’s oceans.

According to ClearView, a disruption in the Strait of Hormuz could push oil prices above $100 a barrel.

Analysts at Citigroup wrote in a note to clients on Wednesday: “Any closure of the Strait of Hormuz would represent a turning point for the global oil market and global economy.”

“In such a scenario, global oil markets would be in uncharted territory and oil prices would likely experience a sharp and significant increase well above previous record highs,” the note said.

Citi stressed that such an event is unlikely and the price increase is temporary in nature as the market adjusts.

Still, a rise in oil prices today would lead to a rise in gasoline prices just weeks before the U.S. election. And it could unsettle consumers and businesses about the stability of the global economy.

“There are few metrics that influence voters’ perceptions of economic well-being more than the price of gas,” Book said.