Escalating tensions in the Middle East and a new round of missile exchanges between Israel and Iran have temporarily boosted the price of oil by about 15% or $10 last week,reaching $78 a barrel. However, despite the rapid geopolitical deterioration, international prices do not appear to be escaping as global crude supply appears adequate and is acting as a drag.

Memories of Ukraine, different backdrop

In contrast to the spike in prices above $100 after the Russian invasion of Ukraine in 2022, the global market today is in a completely different situation. Back then, tight supply, the post-pandemic recovery and the prospect of an embargo on Russian oil acted as catalysts for a prolonged energy shock.

In contrast, demand now remains sluggish due to the slowdown in the global economy, compounded by increased tariffs and the trade war escalated by Donald Trump. At the same time, oil production – from the US, non-OPEC countries and OPEC members that had previously curbed production – is on the rise.

The market picture today

According to the latest report from the International Energy Agency, supply is growing by 1.8 million barrels per day, more than offsetting an estimated 720,000 barrels of demand growth. This difference is fueling the excess supply that is keeping prices in check.

So far, no critical oil infrastructure in Iran or neighboring countries has been affected by the hostilities. Iran’s exports have even increased by about 40 percent to China, reaching 2.4 million barrels a day.

The Strait of Hormuz scenario

Despite Tehran’s constant threats, Iran has not closed the Strait of Hormuz, the sea route through which about 20% of the world’s oil production passes. A closure would drastically affect the exports of countries such as Saudi Arabia, the UAE and Iran itself. International analysts such as Citi consider such a scenario unlikely and short-lived, predicting a maximum price of $90 in the event of a temporary blockage.

Structures and market psychology

If there are attacks on major oil facilities, the possibility of a further increase in prices remains open. However, even then, excess supply will act as a cushion to absorb the pressures.

For now, the oil market is showing resilience and composure. The possibility of a generalized war in the Middle East is what could substantially disrupt flows and lead to longer-term price increases.