Crude oil and the US-Iran conflict

Waging a war in this era is much more catastrophic. And it certainly affects oil prices, and more so when the participating countries are oil exporters. But interestingly, the crude oil prices have been a tad slower in reflecting US-Iran tensions. In a usual scenario, prices would spike much more before an actual attack, and would stay up till the tension lingers. However, in this recent confrontation between the arch enemies, the crude oil remained calm much of the time.

Significant movement was seen when Iran attacked the US military bases in Iraq where the international benchmark, Brent crude climbed by around 4 percent and WTI by around 4.5 percent; and when The US President Trump brushed away any concern by announcing no American casualties, and no serious damage to the energy infrastructure just a couple of days ago, which resulted in Brent falling back down by 4 percent, and WTI by around 5 percent. Surprisingly, the prices remained muted when the crisis escalated as US assassinated the Iranian Military General, Qassim Suleimani.

Why have the crude oil prices remained less responsive in the ongoing conflict? Certain oil market and geopolitical dynamics are responsible for it. The recent decline in crude oil prices came from a dovish response from the US President to de-escalate the tension. The crisis seems to have de-escalated sooner, which has been a key reason for subdued response of crude oil prices.

A calmer response by Trump has cooled down the crude oil prices, which should look as if it eased the concerns of a disruption of crude supplies as a result of the US-Iran fallout. However, another factor that has kept the crude oil spikes at bay has been the incoming oil supplies in 2020. Also, any decline in crude oil transport as a result this standoff has also opened doors for the other oil producing countries to increase production. Increase in production –or even the perception to increase supplies means prices cooling off.

And finally – also a related factor - the Strait of Hormuz has not been affected so far, which if closed could bring the biggest disruption in the global crude oil supplies.

Does this mean that the crisis is over? Not really. The oil prices are well known for the yo-yo effect; the volatility in the prices remain high with spikes waiting for even a smallest move away from de-escalation