The outbreak of the Israel-Hamas war on October 7th has abruptly ended a sell-off in the crude oil market and has contributed to rising natural gas prices in Europe. We expect oil and gas prices to remain elevated at close to current levels for the rest of the year and into 2024.

Why does it matter?

Conflict in the Middle East has reintroduced a sizeable risk premium just when oil traders were having doubts about the sustainability of high oil prices. Oil prices for dated Brent Blend fell to nearly US$80/barrel just before the outbreak of the Israel-Hamas war, but have since shot up to about US$90/b. Before the early October sell-off, oil prices had increased by nearly 30% in July-September amid a tightening market. Global demand—aided by stockpiling in China—grew strongly, even as OPEC implemented further reductions in production quotas and Saudi Arabia extended voluntary cuts until end-2023.

The global oil market is set to remain extremely tight. We expect Saudi Arabia to observe the reduced production quotas that it has agreed with its partners in the OPEC+ group of oil exporters until the end of the first quarter of 2024. The country is also unlikely to increase output markedly over the rest of that year. Additionally, after hitting an all-time high of an estimated 101.2m barrels/day in 2023, global oil demand is set to expand by another 1.3m b/d in 2024.

However, oil traders still remain worried about the impact of higher global interest rates and energy prices on economic growth and energy demand. The market will be largely data dependent as traders look for signs of whether energy demand is holding up in an environment where interest rates look set to remain higher for longer and global energy prices remain elevated for another year. Stock-level data (particularly in the US, where the strategic petroleum reserve has fallen to 40-year lows) will also loom large on traders’ minds. We therefore expect prices to remain volatile and to mostly trade in a range of US$80-100/b.

Our oil price forecasts assume that the conflict is contained to Israel, the Gaza Strip and southern Lebanon. We do not expect OPEC to impose an oil embargo on Israel’s allies, like the one that led to the 1973 oil crisis. However, if the Israel-Hamas war escalates into a wider regional conflict or threatens to disrupt shipping in the Persian Gulf and the Strait of Hormuz (neither scenario is in our baseline), prices will easily spike well above US$100/b.

Geopolitical issues are also affecting European gas prices, which have increased in October. Owing to security risks in the wake of the Hamas attack, production at the Tamar gasfield remains shut. This has halted exports to Egypt, which relies on the gas to supply liquefied natural gas to Europe. European prices were already set to increase in late 2023 and early 2024, as utilities have started to draw down regional stocks ahead of Europe’s 2023/24 winter season.

What next?

We expect oil prices to average close to US$90/b in the fourth quarter of 2023 and then to broadly soften over the course of 2024, to end the year at about US$84/b (revised up from US$80/b in our previous forecast). European natural gas prices should start to trend downwards by the second quarter of 2024. Both forecasts are based on the assumption that the Israel-Hamas war will not disrupt supplies for either commodity. Oil prices will, however, remain highly sensitive to events in Israel and Gaza, and how other countries in the Middle East respond. Given the prevalence of major oil-producing nations in the region, traders will be on high alert for any signs of escalation. Oil markets are in for a bumpy ride.

The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.