Israel-Iran tensions persist amidst shifting oil prices

On the last weekend of October, Israel conducted attacks on Iranian territory, reportedly severely damaging the country's air defence. Iranian President Masud Pezeszkian has announced that this attack will not go without an "adequate" response. Although he downplayed the effectiveness of the Israeli shelling (understandably, as Tel Aviv assesses the situation quite differently), he did admit that at least four soldiers were killed.

Meanwhile, the U.S. Department of Defence stated that a "precise" shelling of "military targets" in Iran ends what was unimaginable a year ago: a direct exchange of blows between Israelis and Iranians, officially dubbed "tit-for-tat"; in other words, an eye for an eye (as Iran shelled Israel a month ago).

Former diplomat in Kabul and Middle East expert Marcin Krzyżanowski does not share the optimism of the U.S. Department of Defence. - I fear this is not the end, and we will witness another round. However, we now have a few days of peace, maybe a few weeks, he forecasts in an interview, an expert on the Middle East at the Warsaw Institute think tank.

The main victims of the decades-long conflict in the region are, of course, civilians - since the Hamas attack on Israel in October 2023 alone, tens of thousands of people have died in the Gaza Strip, which is mired in a humanitarian crisis and regularly bombed. In the context of the mutual rocket attacks between Israelis and Iranians, global attention is focused on the Strait of Hormuz, controlled by Tehran, through which about 20% of global oil supplies flow, amounting to about 15 million barrels per day.

As we reported on money.pl, the Strait of Hormuz is used to transport oil from key producers in the region, such as Saudi Arabia, Iraq, Iran, Kuwait, Qatar, Bahrain, and the United Arab Emirates. The main recipients of these supplies are China, India, Japan, the United States, and Western European countries.

A blockade of this location would be a catastrophe for the global economy. Experts say prices could rise to as much as $150 per barrel (currently it is just under $70 for West Texas Intermediate and $73 for Brent crude). The increases could be even greater in the event of an Israeli invasion of Iran, one of the largest oil producers. And this is notwithstanding the sanctions imposed by the U.S., which are currently loosely enforced. In the context of the war in Ukraine, this does not increase raw material prices, and lower prices mean smaller profits for Vladimir Putin's regime from oil trading.

Nevertheless, good news for Canadian drivers is that experts do not expect Iran to use its "nuclear option" against the global economy. - As long as Iran can sell its oil through the strait, it won't block it because it would be shooting itself in the foot - assesses Marcin Krzyżanowski.

Regarding current oil prices, markets have become accustomed to the Middle East being an extremely turbulent region, where tensions escalate from time to time. Therefore, they do not react as nervously to every rocket fired between Iran and Israel, although such situations were unimaginable a year ago - comments the Warsaw Institute expert.

In terms of oil prices, there's a constant so-called risk premium, which usually rises in anticipation of an expected strike, after which markets hold their breath and usually recently exhale with relief because the blow turns out not to be as strong as feared.

This pattern was visible, for example, on Monday, October 28th, when Brent and West Texas Intermediate oil prices fell by 6% and stabilized above $71 and $67 per barrel, respectively, on Tuesday, rising by about two dollars by Sunday.

The market's significant relief results from investors' concerns that Israel would follow through on its threats and attack Iran's nuclear and oil infrastructure. However, the administration of U.S. President Joe Biden restrained the far-right government of Benjamin Netanyahu.

The Democrat suggested that he would consider alternatives to shelling Iran's oil fields if he "were in the shoes" of the Israeli government. It's important to remember that elections will soon be held in the United States, and Tel Aviv is heavily depleting its weapon reserves, which are supplied by the U.S.

If Israel carried out this threat and managed to destroy, for example, an oil terminal in Jask or on Kharg Island, Iran would be unable to sell its oil for at least a few weeks, if not months. This would mean removing over 2 million barrels of oil per day from the market. Before other major producers like the Saudis or Russians could fill this gap, we would witness at least a temporary but significant increase in oil prices - says Marcin Krzyżanowski to money.pl.

However, the question remains as to what will happen next in the Middle East. The mentioned terminal in Jask was built by Iran just beyond the Strait of Hormuz precisely to ship oil there via pipelines and mitigate, at least for itself, the effects of a potential blockade.

"The terminal was designed to load up to 1 million barrels per day and store 20 million barrels. However, only one of the three planned loading buoys has been installed, limiting its operational capacity," explains the e-petrol.pl portal.

Striking Iran's oil infrastructure, although deemed unlikely by experts, would be beneficial for Israel for several reasons.

- The goal for Israel here would be to undermine the Iranian economy. Iran has indeed done a lot to reduce its budget dependence on oil exports, but it still accounts for the lion's share of revenue. A blow to oil installations would cause an even more severe crisis in the Iranian economy than the current one - Marcin Krzyżanowski explains.

- Israel hopes that in such a situation, Iran will first have less money for its anti-Israeli activities, for arms, and secondly, if everything goes well from Israel's point of view, there may be some economic-related social unrest - adds the Warsaw Institute expert.

- The Israeli strike, regardless of whether it was as effective as Prime Minister Netanyahu presents it or as ineffective as the Iranians present it, was a combination of a warning, a display of strength, and a real attack, because quite serious damage to Iranian air defence systems likely occurred. However, we are not 100% sure and probably won't be any time soon - comments Krzyżanowski.

- It is worth noting that most likely under American pressure, Israel did not decide on a full-scale attack on oil and nuclear installations - he evaluates.

- Israel settled for attacking air defence systems because, on one hand, it is a show of force on the principle of "we can destroy everything you have whenever we want", but at the same time, it is not going all-in. Colloquially, this is roughly what this signal sent with the rockets by Israel looks like - the Iran expert adds.

What's next? The escalation of violence ongoing since October last year in the Middle East, according to Krzyżanowski, is merely a "battle" in a long-running war. He believes that this skirmish has already passed its climax. Essentially two, namely the terrorist attack by Hamas last October and the now-famous pager attack by Israeli intelligence, which seamlessly transitioned into the bombing of Lebanon and a ground operation. The broad confrontation, according to our interlocutor, is heading towards de-escalation.

- This doesn't mean that we won't witness some spectacular events, as Israel is still conducting a ground operation in Lebanon, where, to put it mildly, Israel's successes are moderate, far less successful than the actions of special services or the Israeli air force - comments Krzyżanowski.

The expert points out that Hezbollah still retains its combat capabilities, despite the elimination of its leadership, the intense bombing campaign, and the pager attack. And it still can offer organized resistance to the Israeli army in southern Lebanon.

We are very far from an Israeli victory here, especially since even in the Gaza Strip, after more than a year of very intensive bombings and systematically leveling the Gaza Strip, Hamas also continues to operate. Of course, it has been severely depleted, but it has managed to survive. And if so, it will rebuild itself very quickly once the guns fall silent - predicts the former diplomat in Kabul.

- I expect that Arab countries and until now will stay somewhat on the sidelines of this conflict. On one hand, they are compelled to take a stand because it concerns their brethren in faith, Arabs. On the other hand, the governments of Arab countries, especially the monarchies from the Arabian Peninsula, are tired of the decades-long ongoing conflict. For them, the Palestinian issue is very inconvenient. Arab countries are unable to resolve this conflict on their terms, and on the other hand, the issue of normalizing relations with Israel hampers business - he notes.

Neither in the short nor long term does Iran seem to be laying down arms. Its government, as reported by Reuters on Tuesday, plans to increase military spending by about 200%.