Oil Prices Await Decline Despite Middle East Tensions

Oil prices have gradually declined over the current week amidst intensifying military pressure by Israeli forces in the Gaza Strip. One might assume that a massive aerial attack by Iran on Israel would have led to a spike in oil prices, or that Israel's tough yet limited response to Tehran's missile terrorism could have driven prices up. However, no such increase has occurred. What, then, can be expected from oil prices, and consequently at the fuel pumps? In fact, nothing extraordinary due to the conflict in the Middle East. Rather, oil appetites from the EU and China, as well as the effectiveness and precision of sanctions against Russian oil exports, are likely to be more influential.

The latest movements in the oil market at the beginning of this week include a brief rise followed by a continued downward trend. Hints of a rise were due to improved economic data from Europe. However, the market simultaneously weighed the potential consequences of possible new US sanctions on Iranian oil exports, given that Iran is one of the largest exporters.

Iran Plays a Role, But Not the Largest

Significant fluctuations? Not at all — just a few cents per day. In reality, the market did not notice this. Could significant changes in the oil market have occurred due to Iran's attack on Israel? Actually, these changes began somewhat earlier in April, after the first day of the month when Israeli air forces struck a building housing the Iranian consulate in Damascus, killing eight people, including senior Al-Quds Force commander Brigadier General Muhammad Reza Zahedi, who was in charge of foreign policy tasks.

Immediately after the strike on April 1, Brent crude oil prices soared from $87.2 a barrel to $91.2 a barrel over four days, approximately a 5% increase. It was clear—this was a significant push, indicating Israel's serious stance.

In response, on April 13-14, Iran attacked targets within Israel using 170 kamikaze drones, 120 ballistic missiles, and 30 cruise missiles. The attack was repelled by joint efforts from Israel, the USA, the UK, and Jordan. There was no immediate market reaction as it was a weekend. However, on Monday, April 15, oil prices were even slightly lower than the previous Friday—about $90 a barrel. And by April 17, they had dropped to $87.3.

What really drives oil? It seems that the most powerful factors are not the tensions between Iran and Israel.

Europe's situation is crucial. The livelier the European economy, the greater the demand for oil. Regardless of the "green transition," the region is one of the most noticeable consumers. And Europe doesn't just consume oil; it actively imports it.

The economy of China also has a significant impact. However, the situation there has not been very cheerful lately. Although the Communist Party of China (CPC) is doing everything possible, and even the impossible, to avoid cooling the country's economy due to, for example, a mortgage crisis.

Depriving Moscow of Oil Dollars

The ongoing war in Ukraine, into which Russia fully invaded on 24 February 2022, is notably impacting the global market. Russia is among the world’s largest oil exporters, and it is the revenue from oil exports that enables Moscow to finance this aggression. Indeed, the USA and the EU have attempted to undermine Russia's export revenues with sanctions, yet without reducing the physical export volume, namely in tonnes. According to the opinions of the US and the EU governments, a physical cut in Russian oil exports would lead to an undesirable rapid increase in prices.

To limit Russian oil profits, developed nations have introduced a particularly interesting form of sanctions: a price cap. Specifically, Moscow is allowed to freely export oil at a price no higher than $60 per barrel. Any higher price would attract sanctions.

Although this was an incredibly lenient regime for reducing Russian oil revenues, it has nonetheless partially succeeded in diminishing the oil income to the Russian state budget.

At this point, some discrepancies emerged between the interests of Ukraine and its partners who introduced these fairly moderate sanctions. Kyiv justifiably believes that the sanctions pressure should be much stronger. While this pressure does harm Moscow's aggressive capabilities, it does not completely eliminate them.

This became most evident at the end of September 2023, when following agreements between Russia and Saudi Arabia to cut production and exports, oil prices began to sharply rise and quickly reached $96.6 per barrel, showing an increase of approximately +15% within a month. However, they then started to settle back towards $90 per barrel. Even a horrific terrorist attack on 7 October 2023 by Hamas on Israel did not lead to a significant increase in prices. Moreover, after a local peak in October to $90.2 per barrel, prices continued to decline for two months. By mid-December, they had fallen to $72 per barrel.

Photo: EU prepares 14th Sanctions Package Against Russia with oil restrictions. Source: freepik

Sanctions, Kyiv-style

Ukrainians have closely watched all these processes, as they lacked significant leverage to push their partners to intensify sanctions against Russian oil exports. Kyiv needed weapons and funds, while its partners preferred relatively low oil prices. Advocates for prioritising low prices believed that overly strong sanctions would drive prices higher.

Against this backdrop, Moscow continued to earn staggering revenues from oil, despite the restrictions. This included because it actively expanded oil exports using so-called "shadow" tanker fleets. And this "shadow" export, which, of course, remains outside the perimeter of sanctions, continues to this day. A particularly popular scheme involves Russian ships arriving in the Laconian Gulf near the southern coast of Greece, where they transfer oil to other tankers directly at sea.

Direct concealment of exports from Russia is no longer fashionable – it stayed in 2022. Now, overt abuses have given way to concealed abuses. This is when Russian oil is exported with hidden data about its origin. Such oil easily makes its way from the same Laconian Gulf even to EU countries and other developed nations that support sanctions against Russia.

And certainly, the scale of Russian exports to countries that have not joined the sanctions or only ostensibly support them is striking. Specifically, Andriy Klymenko from the Institute of Black Sea Strategic Studies, who investigates Russian oil exports, reported on its impressive scale and interesting features as of March 2024 on 23 April.

According to Andriy Klymenko, in March 2024, Russian crude oil was transported from Black Sea ports by 36 tankers, moving a total of 4.3 million tonnes. These tankers were registered under various flags:

9 tankers were from China, accounting for 25.0%;

7 from Greece, representing 19.4%;

5 from the UAE, making up 13.9% (including those possibly owned by Russian entities);

5 from the Marshall Islands, also 13.9% (noted as an offshore jurisdiction);

4 from Turkey, making up 11%;

2 from India and 2 from Indonesia, each accounting for 5.6%;

1 from Vietnam and 1 from Liberia, each 2.8% (the latter is also an offshore jurisdiction).

As Moscow continued to reap significant oil revenues, Ukraine decided it could not stand idly by. In January 2024, Ukraine launched two kamikaze drone strikes on export terminals near St. Petersburg on the Baltic Sea, nearly a thousand kilometres from the Ukrainian border. This was followed by several more strikes targeting Russian oil refineries, which reportedly reduced Russia's refining capacity by 12% to 15%.

These actions had such a notable impact that Washington issued a mild reprimand to Kyiv for its effectiveness. Despite this, Ukrainian forces continued their campaign against Russian refineries, citing the fact that the reduction in refining capacity did not hinder the export of crude oil, though it did diminish the revenues from the more profitable refined oil products and caused a fuel shortage for Russian military operations.

It is important to note that Kyiv has not yet targeted the largest cluster of oil terminals around the Novorossiysk port on the Black Sea. This may be due to the endpoint of the Caspian Pipeline Consortium (CPC) pipeline there, which transports oil from Kazakhstan to this Black Sea port. Stakeholders in the CPC and oil companies in Kazakhstan include major international players like ENI (Italy), Shell (UK), Chevron (USA), ExxonMobil (USA), TotalEnergy (France), and Inpex (Japan). However, if sanctions against Russian oil exports do not become more robust, future actions could occur. The outcome may hinge on the specifics of the EU's fourteenth sanction package, which is rumoured to include real price caps on Russian oil.