Tuesday, July 23

Middle-East Conflict and its Impact on Crude Oil Prices

With the Middle East comprising almost half of the world’s oil reserves, this region is crucial in determining crude oil prices. Since crude oil is traded as a commodity in the markets, the geopolitical conditions of this region directly impact the oil supply, which in turn affects oil prices.

In this blog, we will examine the Middle East conflict’s impact on crude oil prices and scrutinize the crude oil futures price.

The Crude Oil Price Scenario in the Global Market

In April 2024, The International Monetary Fund (IMF) outlined an adverse scenario where any escalation in the Middle East conflict would lead to a sharp 15% rise in oil prices. In addition, the disturbance in shipping routes would lead to a surge in shipping costs, which can spike global inflation by 0.7%!

Washington-based institution, The World Bank, also stated that this conflict would push the oil prices over $100 and reverse the recent downtrends in global inflation. It also forecasted that in the best-case scenario, despite the worsening crisis, the average barrel price would be $84.

Additionally, its reports predicted that a mild disruption in the supply chain could raise the average Brent price to $94 while a severe supply chain disruption will push it over $100.

The Crude Oil Price Scenario in the Indian Market

India is a net importer of crude oil. Therefore, it will likely impact the economy profoundly. This is because these imports satisfy 85% of the country’s energy needs. Given India’s reliance on Middle Eastern oil, it is highly vulnerable to price volatility.

According to official data, the country’s crude oil import dropped 16% in FY24. However, its reliance on overseas oil increased significantly.

While the import bill should have risen significantly, economists predict that India will keep its import bill under check because it can import oil from Russia at lower costs. Currently, India imports 30% of crude from Russia, which will act as a buffer to regulate prices.

That being said, a dramatic escalation in the Israel-Iran conflict will sooner or later be reflected in the rising crude oil prices in the country.

Impact on Crude Oil Futures and Options

Oil futures experienced a price dip in April due to the risks associated with the supply due to the Middle East conflict. On April 22, 2024, the Brent Crude settled at $87 per barrel, a 0.33% fall.

According to experts, the supply side will tighten this summer, but the fundamentals on oil are strong. It is also believed that if the supply chain is not disrupted despite the geopolitical risk premium, the markets will remain balanced. The same might be valid for the crude oil option chain.

Conclusion

A multitude of geopolitical rifts and conflicts worldwide will play a key role in influencing crude oil prices. With the Middle East being one of the largest crude oil hubs, any escalation in the war will negatively impact the market sentiments.

Therefore, ensure that you keep a keen eye on the price movements before trading in crude oil futures and options. Happy Trading!

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