Crude Oil Price Volatility at Mercy of Geopolitical Risks?
Crude oil price volatility may rise as geopolitical tension in the Middle East and Russia escalate the risk of supply disruptions.
The long-simmering conflict between Israel and the Lebanese, Iran-backed militant group Hezbollah has escalated sharply in recent weeks, raising fears that the two sides could be sliding towards an all-out war. Simultaneously, Ukraine has increasingly targeted and struck more of Russia’s crude oil facilities and ports.
Collectively, these geopolitical risks could push crude oil prices higher as real or imagined risks of supply disruptions rise. Remember the Thomas theorem: “If men define situations as real, they are real in their consequences”.
Let’s take a look at the situation.
Middle East: Israel, Hezbollah, and Lebanon
Since last October, when the latest round of fighting broke out between Israel and Palestinian militants in Gaza, Hezbollah has launched near-daily rocket attacks across the Lebanon-Israel border. The Iranian-backed group says the attacks are in solidarity with Palestinians, aiming to divert Israeli forces from the Gaza offensive.
But the cross-border fire has intensified dramatically since an Israeli airstrike on June 12 killed a senior Hezbollah commander, Sami Taleb Abdullah, in southern Lebanon. Hezbollah has responded with a barrage of rockets, anti-tank missiles and explosive drones targeting Israeli military positions and towns near the border.
Israel has retaliated with airstrikes on Hezbollah positions in Lebanon. Both sides have warned they are prepared to escalate further if necessary. On Tuesday, Hezbollah leader Hassan Nasrallah claimed his group had acquired new offensive weapons and intelligence capabilities to strike deeper inside Israel.
"When the time comes, they will be revealed on the battlefield," Nasrallah said, showing footage allegedly taken by a Hezbollah drone over the Israeli city of Haifa. Hizbollah has also warned Israel of a war "without limits" and threatened Cyprus.
Source: Al Jazeera
Israeli military officials acknowledged Hezbollah's enhanced capabilities but insisted Israel has the ability to counter the threats. "The enemy is only privy to a fraction of our capabilities," said Lt. Gen. Herzi Halevi, Israel's military chief.
In response, Israeli Foreign Minister Israel Katz issued an explicit warning of an "all-out war" against Lebanon, stating Israel is "very close to the moment of decision to change the rules against Hezbollah and Lebanon." The Israeli military announced operational plans for a potential offensive against Lebanon have been approved and validated, with decisions made to increase troop readiness.
He cautioned that in such a war, "Hezbollah will be destroyed and Lebanon will be severely hit", while acknowledging Israel would also "pay a price on the front and home fronts."
The U.S. has urgently dispatched envoy Amos Hochstein to try defusing tensions, with Hochstein expressing concern over the "seriousness of the situation and the urgency of finding a diplomatic solution" after meetings with Israeli and Lebanese officials. Hochstein stated the U.S. aim is to "avoid a further escalation to a greater war."
The risk of miscalculation leading to a wider war is high. Over 400 people have been killed in Lebanon so far, including over 80 civilians, according to reports. In northern Israel, 27 people have died in Hezbollah attacks.
Nasrallah said a ceasefire in Gaza would be needed to halt Hezbollah's operations.
Israel and Hezbollah fought a 34-day war in 2006 that ended in stalemate. But Hezbollah's arsenal has grown significantly since then, with an estimated 150,000 rockets and work on precision-guided missiles, according to U.S. and Israeli intelligence.
As the deadly exchanges continue, the risks are rising of the confrontation escalating into a wider conflict that could destabilize the entire region. Diplomatic efforts so far show little sign of cooling the crisis.
Russia-Ukraine War
Over the past three months, Ukraine has significantly escalated its military campaign targeting Russian oil refineries, depots and ports with drone strikes deep inside Russian territory.
This new front in the war aims to disrupt Russia's energy sector and undermine its ability to wage the ongoing invasion of Ukraine. Since early 2024, Ukraine has attacked at least a dozen Russian oil facilities with drones.
The strikes have already disrupted around 10% of Russia's oil refining capacity, the UK's Ministry of Defense estimates. Other major attacks include:
In February, Ukraine also targeted the LUKOIL Volgograd and NORSI plants.
In March, the NORSI refinery, Russia's fourth largest, was struck by drones, wiping out at least half its output according to reports.
In April, a drone strike hit the LUKOIL Volgograd refinery, Russia's largest producer of petroleum products in the south near Ukraine.
In May, Ukrainian drones struck two oil depots in the Krasnodar region and the Neftekhim Salavat refinery in Bashkiria, over 700 miles from the Ukrainian border. The Salavat facility is one of Russia's largest refineries, producing 11% of the country's gasoline
Railway data suggests several of the attacked refineries had supplied fuel to Russian military units fighting in Ukraine. Court documents show NORSI and Volgograd had contracts to provide oil products to the Russian defense ministry and intelligence services in recent years.
The latest strike occurred on June 17-18, when Ukrainian drones attacked oil storage tanks in the Russian port city of Azov, causing a large fire. The port of Azov has two oil product terminals that handled around 220,000 tons of fuel exports from January to May 2024.
Analysts say the ongoing strikes on Russia's oil infrastructure are boosting the risk premium priced into crude futures, as they pose a threat to global supply.
Ukraine argues that Russia's oil infrastructure is a legitimate military target, as energy revenues are funding the invasion. But the Biden administration has urged Ukraine to halt the refinery strikes, fearing they could disrupt global oil markets and drive up gasoline prices ahead of the 2024 US presidential election.
The drone campaign has revealed vulnerabilities in Russia's air defenses. Strikes have continued despite Russia's efforts to bolster protection for its oil facilities. The attacks are part of Ukraine's strategy to target Russia's economic and military potential beyond just the frontlines in occupied Ukrainian territory.
Military analysts believe Ukraine's drone strikes aim to disrupt Russian logistics and fuel supplies for its tanks, ships and planes. Reducing Russia's refining capacity could create long-term challenges for the military, as sanctions limit access to Western technology needed to repair damage.
The process of repairing damage from drone strikes is further complicated by the fact that Russian refineries are heavily reliant on Western technologies. With sanctions limiting Russian access to critical parts and equipment, resuming operations at targeted refineries is likely to be a costly and time-consuming process.
Looking ahead, crude oil prices will also fluctuate as a function of demand in the US, China, and Europe, the world’s three regional, powerhouse economies. Geopolitical risks will not likely alter the medium-term trend, but it certainly will haze the outlook.
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