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Even if the Israel-Hamas conflict expands, falling oil consumption will keep prices in check, JPMorgan said.
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Higher prices, paired with declining currencies and surging borrowing costs, have cut into oil demand.
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Analysts also noted that Israel’s previous military conflicts have rarely caused lasting price turmoil.
Investors stressed that a wider Mideast conflict could catapult crude prices upwards should take note of how far global demand for oil has fallen, JPMorgan outlined in a Friday note.
Though there’s room for concern that the Israel-Hamas war could expand into a broader Middle Eastern clash, it’s unlikely that this would fuel a prolonged oil price spike, analysts said.
“Even if the fighting spreads beyond Israel and the Palestinian territories, it is unlikely to result in a prolonged oil price spike” they predicted. “There are tangible signs that high oil prices amplified by surging borrowing costs and depreciating EM currencies began to erode fuel consumption.”
Oil demand in Taiwan, Thailand, Japan, and South Korea has fallen, while total crude imports into Pakistan, Bangladesh, and Sri Lanka are also down, according to JPMorgan.
This is on top of observations JPMorgan had previously made about demand destruction, as high summer prices and the end of peak travel season pushed consumers away.
While geopolitical fears have sent Brent crude into the $90 range, the bank sees this as relatively restrained.
“Beyond the short-term spike induced by geopolitics, our base case for oil remains that large inventory draws observed in 3Q23 will transition to a largely balanced market in 4Q23 (our model oscillates between 100 kbd build and 100 kbd draw) with Brent exiting the year at $86,” the note said.
For now, JPMorgan doesn’t see the Israel-Hamas war spreading to a more regional conflict, saying that Israel, Iran, the US, Saudi Arabia, and the UAE have strong incentives to keep conflict contained.
This is evidenced by the fact that top energy producers like Saudi Arabia and the UAE haven’t supported an oil embargo on Israel or its allies, it added.
In addition, oil prices rarely experienced long-term turmoil during most of Israel’s past conflicts, JPMorgan said. While the country went through 10 instances of major military clashes since 1967, a majority of them resulted in a momentary price jump, given early apprehensions.
“Eventually, oil prices tended to gradually stabilize and decline, resulting in Brent actually trading at a discount to its fundamentally-derived fair value. In these cases, the near-term supply-demand balance and the resulting change in oil inventories have been a more important factor to follow than war,” the note said.
Only the 1973 Yom Kippur war saw longer lasting impacts, given that it led to a Saudi oil embargo against the US.
Broadening this outlook to other Middle Eastern regions, military operations haven’t often led to significant consequences on markets. Prices saw little change in 2011’s Syrian civil war, ISIS’ march on Northern Iraq, nor the Yemeni civil war in 2014.
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