Since topping out at $120 in the summer of 2022, the major oil benchmarks had traded down every month until bottoming at the beginning of December. The decline from the top in June of 2022 was a staggering 40%, and while the oil majors can still make money at that level, with a declining price, many opted to slow or halt production. By March of 2023, West Texas Intermediate had dropped to $67.61, a bottom that remained until late June 2023 when oil broke out.

That furious breakout rally saw Brent Crude hit 98 dollars a barrel on September 28 last year, while West Texas Intermediate (WTI) soared to $89.43. Despite the efforts by Saudi Arabia and OPEC to cut production massively (the Saudis alone cut their output by 1 million barrels per day), oil rolled over after hitting those September highs.

Brent Crude has been down over 20% since then, while WTI is down almost 19%. While American motorists have cheered the lower benchmark pricing as prices at the pump have plummeted, the reality is the tables may be ready to turn in a big way, and oil prices could explode higher again and very soon.

With the Middle East War expanding since the initial Hamas attack on Israel on October 7, which was the first invasion of Israel since the 1948 Arab-Israeli war, the situation has escalated, and it’s starting to look like it could get hideous.

Houthi militants based in Yemen and backed by Iran have been attacking the shipping lanes in the Red Sea, and despite the U.S. and the United Kingdom carrying out coordinated missile strikes on Houthi bases, the militants say they won’t stop the attacks until Israel allows food and medicine into Gaza.

We scoured our 24/7 Wall St, oil and energy research database, and various news organizations worldwide. We found six reasons oil could make a fast parabolic move to $90 or even higher if the Middle East war spreads. It should be noted that higher oil prices would not only affect prices at the pump but could also fan the still-burning inflation flames.

The Israeli Defense Force (IDF) will not back down

Israel has fought numerous wars against Arab powers since 1948, but in the past, victory has often come quickly, and hostilities were terminated fast. The brutality of the Hamas attack in October has changed the game, and leaders have sworn Hamas will be eliminated.

The Israeli Prime Minister is determined and won’t back down either

Prime Minister Benjamin Netanyahu said, “Nothing will stop us. We are going on to the end, until victory, nothing less,” While the U.S. is pushing for an end to the ground campaign in Gaza and called for targeted action against Hamas, it is unlikely they will relent until all of the Hamas leaders are captured or killed and the Hamas forces surrender.

If Iran becomes involved directly, things could get very ugly

While currently, the belligerent regime in Iran continues to wage just a proxy war in the region with support for the Houthis militants in addition to backing Hezbollah and other terrorist organizations. Iran recently seized a tanker loaded with Iraqi crude that was headed for Turkey, and with an estimated $700 million transferred to Hezbollah yearly, they could call on them to support Hamas. Direct involvement by the Iran military would surely draw in the United States.

Fighting could spill over into the oil-producing regions

If fighting expanded across the region’s production facilities in several Arab countries, not the least of Saudi Arabia, there could be a massive drop in OPEC output. Plus, if Iran becomes directly involved, their oil-producing infrastructure would be targeted.

The World Bank had an ominous warning in the fall

Fearing an expansion in hostilities after fighting broke out in the fall, reports indicated that officials from the World Bank said it was possible prices could reach a stunning $150 per barrel this year.

Oil underperformance in 2023 could lead the buyers back as well

Energy posted the worst full-year earnings results of any sector in 2023, according to data published by LSEG, dropping a whopping 26% overall. In addition, Fact Set research indicates that the average upstream company declined 6.8% in 2023. The largest ten upstream companies rose just 3.9%. Puny compared to massive gains of AI-related stocks. This could lead portfolio managers to look for values in an overbought market.

 

 

 

 

 

 

 

 

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