Video | Expert: Escalation of Middle East conflict may lead to continuous rise in international oil prices

The conflict between the U.S. and Iran has been ongoing for nearly a month, disrupting shipping through the Strait of Hormuz and disturbing the global energy supply system, causing international oil prices to surge. Experts analyze that the market is pessimistic about the prospects of the recent conflict ending and the shipping through the Strait of Hormuz returning to normal. At the same time, the Houthi forces have launched attacks on Israel, raising concerns about the potential blockade of the Bab el Mandeb Strait.

If shipping through both straits is obstructed, oil prices will be pushed even higher.

Professor Wan Zhe, Beijing Normal University, Economics Expert: The core trigger is undoubtedly the sharp escalation of the U.S.-Iran conflict, with a substantial closure of the Strait of Hormuz, leading to panic on the supply side. The market shows a stark defensive expansion. On one side are mainstream overseas institutions promoting optimistic rhetoric about reconciliation, while on the other side, military reinforcements continue in reality, and the risk of damage to energy infrastructure is substantially increasing. The market trading has a highly skeptical attitude towards the so-called ceasefire prospects.

Professor Wan Zhe, Beijing Normal University, Economics Expert: The current shipping volume through the Strait of Hormuz has plummeted by over 90%, nearly coming to a standstill. Gulf oil-producing countries cannot transport even if they have spare production capacity, and Russia has even stated it will ban exports to ensure domestic supply, causing a sharp expansion of the global supply gap. The International Energy Agency has stated that the lost oil supply this time exceeds the total from the two crises in the 1970s. Extreme risks are also increasing, with heightened expectations of a blockade of the Bab el Mandeb Strait, which would exacerbate the supply crisis. The Bab el Mandeb Strait is a crucial chokepoint for the Red Sea and Suez Canal routes, accounting for about 10% of global crude oil maritime trade. Iran has clearly warned that it will open a new front here, and its ally, the Houthi forces in Yemen, has also stated they are ready. The market has begun to price in the extreme risk of the second-largest energy chokepoint being cut off, with resonances in logistics and costs further pushing up oil prices.

Geopolitical conflicts have led global shipping insurance companies to significantly raise war risk premiums for tankers. At the same time, the number of tankers willing to take on Middle Eastern routes has sharply decreased, leading to extreme tightness in shipping capacity and a doubling of freight rates. Additionally, rerouting ships around Africa’s Cape of Good Hope has greatly increased both journey and time costs, all of which will be passed on to the onshore price of crude oil.

Moreover, the risk aversion sentiment during the weekend window period pushed prices higher at the end of trading. By the weekend, since the crude oil futures market is closed, any major events that occur cannot be traded. To avoid the risk of liquidation, traders rushed to cover long positions and close short positions on Friday, driving oil prices up to near their highest closing level since the conflict began.

The duration of the conflict and other factors will determine the trend of international oil prices.

Professor Wan Zhe, Beijing Normal University, Economics Expert: Historically, the duration and magnitude of oil price increases triggered by Middle Eastern conflicts depend on the development of geopolitical situations. The Fourth Arab-Israeli War in 1973 caused a rise in international oil prices, leading to the first oil crisis and resulting in a severe global economic recession. The Islamic Revolution in Iran in 1978 triggered the second oil crisis. Following that was the Iran-Iraq War in 1980, during which both core oil-producing countries directly halted production for an extended period. After the Gulf War erupted in 1990, oil prices surged significantly, and the IEA coordinated the release of strategic reserves, causing oil prices to quickly fall back to pre-war levels.

The current situation suggests that the scale of supply shocks may exceed those in the past. The supply gap caused by the closure of the Strait of Hormuz could account for 15% to 20% of global supply. Moreover, the geopolitical uncertainty is higher, the risks of conflict spilling over are still escalating, and there is even a risk of it spreading into a full-scale Middle Eastern conflict. Market panic is stronger than during historical localized wars. For future oil prices, if the conflict maintains its current intensity, the Strait of Hormuz remains closed, and the Houthi forces continue to harass but do not fully blockade the Bab el Mandeb Strait, with no significant diplomatic breakthroughs, prices should remain above $100. If the Bab el Mandeb Strait is blocked, with both core channels simultaneously interrupted, and the conflict expands to more countries, prices will certainly continue to rise. If a significant diplomatic breakthrough occurs, restoring navigation through the Strait of Hormuz, oil prices may quickly fall back below $100.