Hamas v Israel: Why Aren't Energy Prices Higher?

Not Even Iran Can Push Reliably Push The Price Of Oil Up

The rising tensions and conflicts in the Middle East continue to not have the global impacts one would expect them to have.

Even after weeks of US and UK air strikes on their missile bases, munitions depots, and other military sites in Yemen, the Houthi militia is still launching missiles at Red Sea shipping seemingly at will.

The Houthi movement in Yemen says it has fired missiles at two ships in the Red Sea, apparently undeterred by US and UK strikes on the group.

The group's leader Abdul Malik al-Houthi warned that his group would "further escalate" if the war between Israel and Hamas in Gaza did not end.

The Houthis targeted the Star Nasia and Morning Tide ships.

The Greek-owned Star Nasia was damaged but its crew were unhurt, a Greek official told Reuters.

Furadino Shipping Ltd, the British owner of the Morning Tide, said there was an explosion near the ship but that it was undamaged and nobody was hurt and the vessel was able to continue on its route.

These latest missile attacks come not only after weeks of air strikes against targets in Yemen, but also after a major round of reprisals against Iranian-backed militias in Iraq and Syria by the US.

The United States launched attacks against Iran-backed militias in Iraq and Syria on Friday, its first retaliatory strikes for the killing of three American soldiers in Jordan last weekend, according to an official at the Department of Defense.

U.S. military forces struck more than 85 targets, hitting facilities such as command and control centers and drone storage sites, according to the U.S. Central Command.

Nor did the US stop with just that one wave of attacks, as the recent targeted strike which killed Wisam Mohammed Saber al-Saedi, a senior Kataib Hezbollah commander in Baghdad, grimly demonstrates.

A US military strike on Wednesday in Baghdad killed a Kataib Hezbollah commander who was responsible for attacks on American forces in the region, according to US Central Command.

The attack, on Wednesday evening local time, was carried out by a drone against a vehicle in Baghdad, according to US and Iraqi officials. There are no indications of collateral damage or civilian casualties, Central Command said in its statement.

With Iran and its proxies continuing to both stir up mischief in the Middle East, and with the US and UK continuing to retaliate with air strikes, one would be forgiven for expecting the Middle East to be a veritable powder keg, capable of exploding into a regional war at any time, and disrupting oil flows out of the Persian Gulf.

Except that is not what is happening. Certainly energy prices are not reflecting even an expectation of sudden scarcity of Persian Gulf oil.

That should be the expected market behavior given the uncertainty of the overall situation in the Middle East. Why is that not happening?

Certainly there have been reports in Wall Street media which suggest that the ongoing Houthi missile mischief and the tit-for-tat exchanges between the US and Iranian proxy militias in Iraq and Syria are helping to push oil prices up.

Crude oil and gasoline prices Wednesday settled moderately higher.  A weaker dollar on Wednesday was bullish for energy prices.  Also, ongoing geopolitical risks in the Middle East are underpinning crude prices as Houthi rebels attacked two more ships in the southern Red Sea.  Gains in crude prices were limited after weekly EIA crude inventories rose more than expected.  

Geopolitical tensions in the Middle East continue to support crude prices.   The U.S. and UK have ramped up airstrikes against Houthi rebels in Yemen in retaliation for Houthi attacks on commercial shipping in the Red Sea.  Last month, the U.S. Navy advised vessels to avoid the southern Red Sea.  Houthis started attacking ships in the Red Sea in mid-November in support of Hamas in the Israeli-Hamas war and said they won't stop the attacks until Israel ends its assault on Gaza.  Attacks on commercial shipping in the Red Sea by Iran-backed Houthi rebels have forced shippers to divert shipments around the southern tip of Africa instead of going through the Red Sea, disrupting global crude oil supplies.

Until a few days ago, two key factors had kept oil prices down since the beginning of the Israel-Hamas War on 7 October 2023. The first was the exceptionally accomplished diplomacy of U.S. Secretary of State Antony Blinken and his team in preventing the direct involvement of more Middle Eastern states in the conflict. The second was that the White House has been choosing to disregard a dramatic rise in illegal oil exports from Iran to China since Russia invaded Ukraine on 24 February 2022. Irrespective of whether oil enters the global market legally or illegally it nonetheless satisfies a demand and helps to dampen down prices. In the case of this second factor, the U.S.’s toleration of increased oil flows from Iran to China also meant that Beijing was relatively content to use its huge influence in the Middle East to further keep political tensions down. However, the latest military strikes by Iranian proxy forces on U.S. targets that caused the death of three American service personnel, and the subsequent retaliation by Washington against several of Tehran’s military proxies, may mean that this second factor will be taken out of the oil price equation. And if that happens, oil prices could rocket.

The most recent reporting touts the narrative that oil prices are rising even despite reports from the Energy Information Administration that oil inventories are rising in the US.

Reuters market analyst John Kemp, meanwhile, reported that diesel prices were set for a spike this year because of below-average inventories. The spike, however, would only happen if the U.S. and European economies reverse the economic slowdown that marked last year.

Kemp had earlier written that manufacturing activity in the United States was on the rebound, suggesting a further tightening of the below-average stocks of diesel fuel, which would have a fast effect on prices.

Oil prices, in the meantime, were on the rise earlier today, following the API’s release of its inventory estimates. Contributing to the rise was a report from the EIA that forecast a sharp slowdown in oil production growth in the country this year.

Certainly the narratives are painting a picture of rising oil prices and more volatile oil prices.

But what do the oil prices themselves say?

Amazingly, while oil prices have moved up and down in a display of some significant volatility, the longer-term trend in oil prices continues to be down.

However, since the start of 2024, oil prices have risen approximately 3.5%, seemingly in response to both US and Iranian strikes across the Middle East.

Yet even with the price rises following US reprisal attacks last week, oil prices are still well off the January peak reached around the time period that a drone killed 3 US servicemen at Tower 22 in Jordan.

Even Russia’s benchmark Urals crude, which witnessed a significant narrowing of its discount to Brent and West Texas Intermediate during the third week of January, is nearly $3/bbl below its late January peak.

Natural gas prices in Europe have declined between 7.5% and 8.5% since the beginning of the year.

On this side of the pond, however, natural gas prices have fallen by more than 11%.

The one thing that energy prices are not doing in response to events in the Middle East is reliably trending up. Oil and natural gas traders, it seems, are not that worried that war might interdict oil and natural gas shipments flowing out of the Middle East. Thus far, the price rises appear to be tied to specific events, but the rises themselves appear to be largely transitory, with each significant rise followed in short order by an somewhat more significant decline.

A wider conflict in the Middle East just is not producing oil prices rises that last for more than a few days or maybe a week.

One speculation that may account for this lack of pricing response is the assessment by some that Iran was not actively looking for a wider war when its Arab proxy killed 3 US servicemen.

Tobias Borck, an analyst on Middle Eastern security at the Royal United Services Institute, told Business Insider that Iran-backed groups in the region had been intensifying their attacks since then.

The longer the attacks continue, he said, the more the risk of casualties increases.

"You're going to kill people eventually," he said of Iran, pointing to the fact that Iran-backed groups had launched 150 attacks on US bases since last October.

Greg Brew, an Iran analyst for the Eurasia Group, echoed that assessment, commenting on X: "It doesn't track that #Iran would allow its allies in Iraq to launch 200+ attacks on US forces for three months without some expectation that it would cause US casualties."

And The New York Times reported that US officials are trying to establish if the attack was a deliberate escalation or the same kind of attack the US has faced for months that managed to get through by luck.

Indeed, there is at least some evidence suggesting that the three deaths were largely a result of dumb luck and fortuitous timing.

Some analysts are also questioning why the drone, which struck a logistics support base, wasn't intercepted by US air defenses, which have prevented hundreds of other attacks that could have resulted in casualties.

A US official said that the drone was approaching the base at the same time as a US drone was expecting to return, meaning air defense systems were switched off, according to a US defense official cited by CBS.

There are also indications that Iraq might be giving Iran reason for pause in the aftermath of Iran’s missile attacks across Syria and northern Iraq. Iraq is none-too-happy about the missile attacks near Erbil, which claimed the life of an Iraqi businessman and millionaire.

The Central Bank of Iraq (CBI) has revoked the operating license of Iran's Bank Melli International (BMI) in the country, citing the bank's "unprofitability", local banking media reported on February 7.

Bank Melli Iran previously operated several banks in Iraqi cities for several years, including in religious tourism sites in Najaf and Karbala, Baghdad and Basra. However, the al-Sudani government has turned its back on the neighbouring Shi'ite country following an attack on the northern city of Erbil, which killed a millionaire businessman, with a growing boycott of Iranian products and services in several cities. The US has placed increasing pressure on the CBI in recent months, including controlling CBI assets in Washington via the US Treasury.  

While it is impossible confirm Iran’s precise motives for any particular attack, there certainly does not appear to be any solid support that Iran is seeking to push oil prices higher.

One likely reason for the decline in oil prices: European manufacturing has been in a state of contraction since the middle of 2022.

UK manufacturing has followed suit.

China’s manufacturing has, with only a few exceptions, been in a state of contraction since early 2022.

While US manufacturing has been contracting starting in late 2022, in recent months it appears to have been strengthening, and just last month returned to expansion.

With global manufacturing largely in retreat, it is difficult to see from where significant demand pressure for oil will come. Slowing manufacturing in every situation means lower energy demand.

In many respects, the lack of upward price pressure from manufacturing anywhere in the world highlights the shock transition that Europe underwent in 2022 when the outbreak of war between Russia and Ukraine led to a series of sanctions and a major disruption of energy flows into the European continent.

The Energy Crisis Is A Crisis Of Change

Indeed, the extended contraction phase for European manufacturing suggests that Europe is still very much at risk of eventual de-industrialization.

Will Europe De-Industrialize?

Without significant industrial expansions within Europe—and it is difficult to see where demand would originate to spur such industrial expansion—the future of European industry (and European manufacturing in particular) does not suggest there will be a significant upward price pressure for global oil prices any time soon.

China’s ongoing economic collapse eliminates their manufacturing sector as a plausible future source of energy demand.

China's Unstoppable Economic Collapse

Despite ongoing conflict throughout the Middle East—despite continued attacks on Red Sea shipping, and continued drone attacks by Iran’s other Middle Eastern proxy militias—the global economy just does not possess the economic robustness needed for any efforts by Iran (or Saudi Arabia and Russia) to push oil prices up.

If anything, the lack of sustained energy price rises at a time of rising Middle East tensions underscores the extent of global economic weakness. If a constant looming threat of a Middle Eastern war can at most produce only transitory short-term price rises in energy, with the longer trend continuing to be that of pricing decline, we are forced to conclude that the global economy is in a far more parlous state, and has been that way for far longer, than many corporate media narratives have been comfortable admitting.

A global recession is unfolding, and has been for quite some time. Iran’s seeming inability to push oil prices up for any appreciable length of time, coupled with similar Russian and Saudi impotence despite their ongoing production cuts, is a loud and clear alarm klaxon that the global recession is getting deeper, and is likely to remain deeper for far longer than anyone realizes.