REVERSE EFFECT

Apparently, the effect of the ongoing Palestinian-Israeli conflict on European gas prices was not critical in the oil market. The unstable situation did not cause prices soar above $100 per barrel, despite the forecasts. In the first few days following the escalation of the conflict, oil prices rose by 3% on fears of disruption of fuel supplies. On October 20, the price tag hit $93 per barrel.

Over the last three weeks, however, Brent has lost almost 13% of its value amid fears of declining demand in China and the US, as well as the reduction of traders' risk premiums because of the conflict in the Middle East. There were no disruptions in oil supplies from the region, which the market expected.

Amidst the ongoing price decline, the joint November 6 Saudi-Russian decision to extend the monthly voluntary additional reduction in exports of oil and oil products until the end of the year was quite logical. These measures are designed to support the efforts of OPEC+ member states to ensure stability and balance in the market, which is concerned over demand and economic growth.

It is possible that the Middle Eastern situation will be on the agenda at the OPEC+ meeting slated for the end of November. However, the alliance has already made it clear that it was not going to hold any meeting on the conflict or take measures after Iran's call to stop oil supplies to Israel and introduce a number of other sanctions against this country.

Just business

Back on October 17, 1973, it was the same Middle Eastern conflict that caused all Arab member states of OAPEC (Organisation of Arab Petroleum Exporting Countries) cut off oil supplies to the US and its allies (UK, Canada, Netherlands, Japan) who supported Israel in the Doomsday War.

The 1973 oil crisis, also called the oil embargo, was the first energy crisis and is still considered the biggest. Oil was used as a weapon, and quite successfully. As a result, its price rose from $3 to $12 per barrel. The embargo was particularly painful for the US, the largest producer of oil and cars in the world.

OAPEC did not reduce oil production just to influence world prices. The main objective was to create political pressure on the world community to reduce Western support for Israel.

The result of this pressure was a declaration by the Common Market Ministerial Council that supported the Arab position. In addition, almost all African states severed diplomatic relations with Israel.

In March 1974, the embargo was lifted.

After 1973, oil exports to Western countries from the USSR increased markedly. In the US and many other countries, reserve oil storage facilities have been created to reduce losses from subsequent oil crises.

Judging by the statements made this time, OPEC is not ready to repeat the past experience and use oil as a weapon. We can see this from the reaction to Tehran's call on Muslim countries to impose sanctions against Israel, including an embargo on oil and food supplies. Iran's Supreme Leader Ayatollah Ali Khamenei said that Muslim countries should immediately stop any kind of trade and economic co-operation with Israel due to the blockade of the Gaza Strip. To which Nayef Falah Mubarak al-Hajraf, Secretary General of the Gulf Cooperation Council, responded that his organisation was committed to energy security and should not use oil as a weapon. Therefore, Arab countries should not reduce oil production because of Israel's actions in the Gaza Strip.

"The Gulf Co-operation Council works as a clear and honest partner as an oil exporter with the international community, and there is no way we can use this as a weapon," al-Hajraf said.

"OPEC has no plans to hold an extraordinary meeting or take any immediate action after Iran's foreign minister called on members of the Organisation of Islamic Cooperation to impose an oil embargo and other sanctions against Israel," Reuters reported, citing its sources in the cartel.

Saudi Investment Minister Khaled al-Falih, when asked about the likelihood of an embargo, stated that Riyadh was not considering such an option: "As of today, we are not considering such an option. Saudi Arabia is trying to achieve peace through peace talks."

"There are parallels between that Middle East crisis and the current one, but there are also key differences: the global energy industry has changed dramatically since the 1970s and continues to change before our eyes. The world is much better prepared than it was 50 years ago. We know exactly what to do and where to go," said Fatih Birol, head of the International Energy Agency.

Over the past 50 years, the world's oil supply situation has changed dramatically: Western European countries have sharply reduced their dependence on oil, particularly Middle Eastern oil. The US, thanks to the shale oil boom, not only ceased to depend on imports, but also became an exporter of oil. China and other Asian countries have become the main buyers of Arab oil producers, and a rise in global prices would hit the interests of these influential clients harder. In such circumstances, it is unbelievable that OPEC countries will inflict harm on their own economic interests.

In addition, as experts note, today OPEC controls a very different volume of the world oil market than it did in 1973. Back then, OPEC member states (including Iran, which did not join the embargo in 1973) provided 56% of world production, while now only 38%. So the recurrence of embargo is considered unlikely, because it is difficult to ensure its effectiveness with such a low market share.

As to imposing oil embargo only on Israel, the country buys oil (250-300K daily) mainly from Azerbaijan, Brazil and other countries that are not members of the cartel.

We will know soon how the OPEC+ member states evaluate the situation and whether they are planning any additional measures to support prices. On November 25-26, Vienna will host the meeting of the OPEC+ Monitoring Committee and that of the heads of delegations from the member states.

Oil isn't everything

"The impact of events in Israel on the global market is rather limited, as neither this country nor its immediate neighbours are major oil producers, short-term risks to supplies are still low," Morgan Stanley analysts said. However, everything can change if the conflict spreads to other countries, they say.

Expert of CITIC Futures Co. Gui Chenxi recalled that at the beginning of the war in the Persian Gulf (1990) oil prices rose by 240%, during the war in Iraq (2003) by 45%, during the war in Libya (2011) by 40%, but then the quotations declined to previous values.

"The Israeli-Palestinian conflict has not yet spread to neighbouring countries, which are major oil producers, and has limited impact on fundamental indicators. However, the desire to avoid risks may support prices, and the market should keep an eye on a possible escalation of the conflict," Chenxi noted.

The World Bank Commodity Market Outlook reports that unless the conflict widens, its impact on oil prices will be limited. WB economists believe that a sharp change in oil prices can lead to higher food prices in regions that are already experiencing food security problems.

Bob McNally, president of Rapidan Energy Group, predicts that the conflict between Israel and Iran can easily push prices up by $5-10 per barrel, given that 40% of the world's exports go through the Strait of Hormuz, which lies between Oman and Iran. Prices can rise much higher if Lebanon's Hezbollah gets involved in the hostilities.

In more optimistic news, OPEC expects the global economy to grow and boost fuel demand despite economic challenges. "Regarding demand and its prospects, in the short to medium term, we expect a steady growth in the global economy despite all the difficulties and challenges," OPEC Secretary General Haisam Al-Ghais said. The cartel head is confident that oil will retain its leadership in the global energy mix until at least 2045.

Asked whether oil prices will reach $100 per barrel, Haisam al-Ghais said that because of the lack of investment, we are actually jeopardising energy security. "If the global economy wants to avoid higher energy prices, investment in the oil industry has to increase significantly. I think prices and volatility will rise as demand increases," he added.

OPEC estimates that the oil industry alone will require a cumulative investment of about $14 trillion through 2045.

"We call for common sense to guide strategies to realise the three pillars of successful and methodical energy transitions: energy security, affordability and sustainability. A realistic approach requires all of us to recognise the key role oil plays in our daily lives - the role it has played and will continue to play in shaping our times. Everyone has something to say about oil. After all, it matters to us all," said the OPEC Secretary General.

Thus, oil market participants are determined to keep the price balance in spite of wars, conflicts and cataclysms.