How the Middle East situation affects oil prices

By Asif Aydinli

Oil prices are currently experiencing a rapid surge, driven by multiple factors that are mutually reinforcing. First and foremost, positive economic data from the United States have somewhat eased recession fears, signaling an increase in demand for energy resources. The Dow Jones Industrial Average rose by 0.13% , while the Nasdaq Composite increased by 0.51%, reflecting a broader market revival. At the same time, three U.S. Federal Reserve Bank presidents hinted at the possibility of an imminent reduction in interest rates, further fueling investor interest.

However, the most significant factor for the energy market remains the geopolitical situation in the Middle East. The assassinations of Hamas and Hezbollah leaders by Iran, followed by Israel's response, have sparked a new wave of tension in the region. Israel’s invasion of Gaza on August 10, accompanied by airstrikes resulting in numerous casualties, has left the market in anticipation of Iran’s reaction, which, once it occurs, is expected to trigger another spike in oil prices.

Another influencing factor in the oil and gas market is the increase in drilling activity in the United States. According to Baker Hughes data, the number of active oil and gas drilling rigs has risen by two, indicating stabilization and possibly even growth in oil and gas production in the near future. However, this factor has not yet had a significant impact on the market, as the primary driver remains the anticipation of further developments in the Middle Eastern conflict.

It is also worth noting the steady rise in natural gas prices. In the United States, gas prices have climbed to $2.249 per million BTU, while in Europe, September futures at the TTF gas hub have reached $471.8 per thousand cubic meters. These changes in the gas market are also partially driven by geopolitical instability and the associated risks to energy supplies.

Meanwhile, the U.S. dollar continues to strengthen, which typically leads to a decline in oil and other commodity prices. However, this time the situation is different: despite the rise in the dollar index, oil and gas prices continue to increase. The U.S. Dollar Index, which tracks the dollar's performance against a basket of six currencies, rose to 103.047 points, but this did not stop the rise in energy prices. This may be because the dollar’s growth is currently offset by strong market expectations of future disruptions, making oil and gas attractive assets for hedging risks.

Interestingly, Bitcoin, which has become a barometer of market sentiment in recent years, has also seen a decline. On August 12, 2024, by 11:30 AM Moscow time, Bitcoin's price had dropped by 4.15%, reaching $58,883. This decline can be attributed to investors reallocating funds into more traditional assets amid the instability.

In the coming weeks and months, global attention will be focused on the political situation in the Middle East and U.S. monetary policy actions. Any significant event in these areas could become a catalyst for new economic turmoil. If geopolitical tensions in the Middle East continue to escalate, particularly if Iran takes retaliatory action for the assassinations of Hamas and Hezbollah leaders, oil markets could face even more dramatic price spikes. This, in turn, would pressure the global economy, increasing costs for businesses and consumers, leading to further inflation.

Higher oil and gas prices could also create additional burdens for countries dependent on energy imports. As a result, many developing economies, already struggling with high inflation and rising borrowing costs, could find themselves on the brink of financial crisis. Countries with high levels of public debt and balance of payments deficits will be particularly vulnerable.

Additionally, if the U.S. Federal Reserve indeed lowers interest rates, as some experts predict, this could lead to a weakening of the dollar and increased demand for commodities such as oil and gold. However, paradoxically, a weaker dollar could also exacerbate inflationary pressures within the United States itself, leading to further economic slowdown and increased risks for the global economy.

In this context, financial markets may begin to show signs of instability, potentially leading to a decline in the value of stocks and other assets. Investors seeking safety may start moving their funds into more stable assets, such as government bonds and precious metals, which could reduce market liquidity and increase volatility.

Ultimately, if geopolitical tensions spiral out of control and energy prices continue their upward trajectory, it could trigger a full-scale economic crisis affecting both developing and developed countries. A world already weakened by the pandemic and existing economic imbalances could face new challenges, requiring coordinated international action.

Thus, the current situation in the oil and gas market is not just a temporary phenomenon but a potentially explosive mix of economic and political factors that could reshape the global economic landscape in the near future.

News.Az