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LONDON — Crude oil’s latest bull run, which saw Brent soaring to its highest level since 2014 on Tuesday, has put geopolitics at the heart of market concerns.

After spending the last year fringing over the supply, markets and investors suddenly seem more frightened by the “what if” questions of world politics and their impact on still-scarce supplies.

This week’s drone attack on the UAE by Iran-backed Houthi rebels, coupled with fears that Russia’s aggression against neighboring Ukraine will lead to war, are pushing crude oil prices higher. The increase comes despite views in some quarters that supply problems are easing compared to last year. A consensus view of energy analysts suggests that recent geopolitical events, most notably rising tensions in the Middle East and Russia’s saber-rattling, have boosted the price of a barrel of crude oil by almost 12 percent.

Alan Gelder, vice president of refineries, chemicals and oil markets at UK energy adviser Wood Mackenzie, said: “Broadly speaking, geopolitics currently accounts for about $10 of the price of oil.” Goldman Sachs revised its price forecast after the UAE attack up and warned on Tuesday that Brent could reach $90 a barrel in the next two months and $100 in the second half of this year. However, Gelder believes triple-digit oil prices could prove well over target.

He told Arab News: “We do not believe that the oil market will be as tight in 2022 as it was in 2021. We expect US oil production to grow because the investment discipline of recent years will now allow companies to to drill and increase investment supply while generating high returns for investors.”

He added: “You never say never, but we think $100 oil forecasts are a bit overrated. The number of oil rigs in the US is increasing, albeit slightly, so supply will increase this year. Geopolitical events are of course difficult to predict and can cause further price shocks, although it would take an extreme burst of production from a major supplier for current supply and demand fundamentals to be affected.” It is worth remembering, however, that geopolitical events are behind the first major surge of oil prices last year.

In March 2021, shortly after OPEC and its OPEC+ allies announced they would stand by their production cuts, the Houthi militia launched a failed attack on the oil export terminals and refineries at Ras Tanura in Saudi Arabia.

QUICK FACT

A consensus view of energy analysts suggests that recent geopolitical events, most notably rising tensions in the Middle East and Russia’s saber-rattling, have boosted the price of a barrel of crude oil by almost 12 percent.

Ras Tanura was not damaged, but the attack briefly pushed Brent crude above $70 a barrel.

The six-year war in Yemen, in which Saudi Arabia leads a coalition of countries fighting the Iran-backed Houthis, has led to a spate of attacks on the kingdom’s energy infrastructure and oil tankers in the Red Sea and Persian Gulf.

In fact, a report last month by a respected Washington-based think tank, the Center for Strategic and International Studies, said Houthi attacks on Saudi Arabia more than doubled in the first nine months of 2021 compared to the same period last year to have. According to the report, Iran’s Islamic Revolutionary Guard Corps and the Lebanese Hezbollah militia played a crucial role in providing the Houthis with weapons, technology and training.

Concerns about possible disruptions to Saudi output at prices should also coincide with the likelihood of an easing of sanctions on Iran – a giant crude oil producer but whose meager exports now depend on smuggling.

Fast forward to today, and bloody unrest in Kazakhstan — an OPEC+ member and second-biggest oil producer in the former Soviet Union at nearly 2 million barrels a day — had already propelled Brent nearly 5 percent earlier this month to $83. Ironically, initial anti-government protests were sparked by a price increase for LPG, which many Kazakhs use to power their cars.

The UAE attack, which has brought Brent a little closer to Goldman Sachs’ $90, is the Houthis’ most significant strike at the Emirates since their military withdrawal from the Yemen conflict in 2019, though it still supports forces that are fighting fight the Houthis.

Meanwhile, a build-up of Russian troops on the Ukrainian border and fears that Vladimir Putin will invade and trigger a NATO response with economic sanctions or, in the worst case, a larger conflict, are driving prices even higher.

Tensions surrounding Gazprom’s Nord Stream 2 pipeline project have already played a large part in driving up gas prices across Europe. Gas prices have fallen sharply so far this year, but Ukraine is a key route for Russian oil and gas supplies to Europe, which is heavily dependent on Russia for its energy needs.

Giovanni Staunovo, Energy Strategist at UBS, said: “There is also likely a geopolitical risk premium related to tensions in Eastern Europe and the Middle East, but this is difficult to quantify. Historically, such risk premia have stayed in price only when these tensions triggered some supply disruptions. However, there are currently no disruptions.”

Perhaps a more relevant risk to oil prices lies in market fundamentals, particularly concerns about OPEC’s ability to pump more crude if higher demand necessitates it. Several OPEC members are struggling to ramp up production to required quota levels, and Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman said this week the kingdom has no plans to make up for its lost production.

Staunovo said: “Some oil demand concerns surrounding the Omicron variant have not materialized as oil demand is holding up better than some feared as recently as December. But the oil market is tight, with petroleum inventories and crude and oil products at multi-year lows, and if oil demand continues to recover to 2019 levels, available spare capacity should also fall to low levels, making the oil market and Prices are very sensitive to supply disruptions.”

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