Dennis Kissler, BOK Financial Securities

As concerns about slower economic growth in the U.S. and China have applied downward pressure to crude oil prices, they’re not falling as much as they would if geopolitical unrest weren’t applying pressure in the opposite direction.

Oil prices were up about 4% on Oct. 10 due to a spike in U.S. fuel use before Hurricane Milton barreled across Florida; Middle East supply risks; and signs that demand for energy could grow in the U.S. and China, Reuters reported.

Still, the current situation begs the question of whether the conflicts in North Africa and the Middle East, as well as between Russia and Ukraine, will continue to support crude prices and, if so, for how long.

Geopolitical unrest heightens

The short answer is yes, but the support likely will be temporary. Political unrest in rich oil-producing regions such as Libya, which currently exports 1 MMbbl/d, can definitely change the microeconomic availability and near-term pricing of crude if those exports are taken off the global market. In fact, the current internal political tensions within the country could do just that.

Meanwhile, the Israel/Hamas war directly involves Iran. The tension has grown with Iran’s statement that it will eventually make a calculated military response to Israel’s assassination of Ismail Haniyeh, a Hamas political leader who was killed in Tehran. Not surprisingly, U.S. crude oil futures jumped 4% on the news, as the assassination reignited fears of a regional war that could have a major impact on oil prices. Iran exports 1.8 MMbbl/d.

And then there’s the impact of the Red Sea attacks to consider. On Aug. 21, Houthi fighters attacked the Greek oil tanker MV Delta Sounion, setting it ablaze. The tanker, carrying more than 1 MMbbl of crude oil, was still on fire when it was towed to safety in mid-September, which averted a serious environmental disaster had there been a large leak. Meanwhile, crucial shipping lanes have been disrupted near the tanker’s location.

Unrest and oil supply deficits

As I’ve written before, if the Red Sea attacks were to escalate—for example, if an oil tanker were to sink or tanker crew members were to be killed—then we could see a total stoppage or very long delays of shipments through that route, which would add a war-type premium to crude oil and other petroleum product prices. If that occurs, it would have a negative effect on global economies and could reignite inflation very quickly.

There are other scenarios that could upset the balance between oil supply and demand, resulting in higher oil prices. For example, if there continues to be unrest within Libya and exports are reduced or eliminated, and if Iran were to lash out and put a military blockade into effect, more than 2 MMbbl/d conceivably could be taken off the global markets.

‘Sell the; buy the fact’ rings true

While these scenarios could unfold in the near future, the reality is as always: “Sell the rumor/buy the fact.” Higher prices caused by temporary geopolitical events eventually bring on more supply, with OPEC, the U.S. and Russia ramping up production and exports.

Yes, even Russia could ramp up production, despite the Ukrainian drone attacks on the country’s oil infrastructure. After all, Russia continues to export huge volumes of oil and a fair amount of natural gas, so the attacks don’t seem to have made a large impact on the country’s production capabilities.

History shows that producers benefit the most from selling/hedging into geopolitical unrest rallies rather than remaining on the sidelines. Keep in mind that events like these cause the participating countries to suffer financially. This quickly places them in a dealmaking mode, so oil supplies soon return to the marketplace.

Although these current events—and the potential for heightened unrest—is deeply concerning on many levels, oil supply isn’t necessarily one of them and any support to crude prices from these events usually is just temporary.

Dennis Kissler is senior vice president of trading for BOK Financial Securities. He is based in Oklahoma City.

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