News Analysis | Three Key Variables Affecting International Oil Price Trends

Xinhua News Agency Beijing, April 1 — News Analysis | Three Key Variables Affecting International Oil Price Trends

Xinhua News Agency Reporter Chen Sida

Recently, international oil prices have experienced significant fluctuations. On March 31, London Intercontinental Exchange Brent crude oil futures achieved a record monthly increase of over 60%, and on April 1, they declined sharply again. Some market analysts believe that the future trend of international oil prices will depend on three key variables: whether transportation channels are “blocked,” the release of oil reserves, and the duration of the ongoing US-Israel-Iran conflict. Currently, the conflict in the Middle East continues to escalate and spill over, making it difficult to fill or even potentially widen the oil supply gap, with a high risk of rising oil prices.

The first variable, whether the Middle Eastern oil transportation channels are “blocked.”

The main reason for the surge in international crude oil prices is the “blockade” of the Strait of Hormuz, and the current navigation situation in this strait remains severe. Recent US media reports indicate that hundreds of US special forces soldiers have arrived in the Middle East and may participate in seizing control of the Strait of Hormuz. According to Iranian media, the Iranian Islamic Revolutionary Guard Corps Navy reaffirmed on March 31 that they have full control over the Strait of Hormuz.

In addition to the Strait of Hormuz, the Bab el-Mandeb Strait connecting the Red Sea and the Gulf of Aden is also becoming a focus of attention. If the conflict spreads to the Red Sea region and causes navigation disruptions in this strait, it could exacerbate energy supply shocks and further push up oil prices. Data from the US Energy Information Administration shows that before the outbreak of the US-Israel-Iran conflict, about 12% of global oil transportation passed through the Bab el-Mandeb Strait. On March 28, Yemen’s Houthi forces announced attacks on Israel, raising concerns that the Red Sea route could become a new front of conflict. If the Houthis harass or even blockade the Bab el-Mandeb Strait, this alternative route will also fall into “blockade.”

Saudi Arabia is transporting crude oil via pipelines to the Yanbu port on the Red Sea, with a daily throughput of about 5 million barrels. According to David Roch, strategist at Quantum Strategies, the supply of oil transported through this pipeline is very fragile because the Bab el-Mandeb Strait could be blocked.

The second variable, whether the release of oil reserves by various countries is effective in terms of strength and pace.

As a measure to mitigate supply shocks, releasing oil reserves or other alternative supplies is actually a “drop in the bucket.”

The International Energy Agency (IEA) recently announced that 32 member countries unanimously agreed to use 400 million barrels of strategic petroleum reserves, and further releases may still be possible “if necessary.” According to Samantha Gross, an energy expert at the Brookings Institution, the strategic oil reserves released by the IEA account for about 7% of global demand, but the actual impact of shipping disruptions through the strait on global demand is about 15% to 17%. IEA Director Fatih Birol warned that further releases of oil reserves cannot fundamentally solve the supply shortage.

Marco Papić, geopolitical strategist at BCA Research, said that since the planned use of strategic reserves and Russian oil supplies exempted from sanctions will be exhausted, the world will face an “oil supply cliff” in mid-April.

Even if the conflict ends, restarting the suspended oil production capacity will take time, and oil prices will not fall quickly. Many Middle Eastern oil-producing countries, due to limited storage capacity and transportation difficulties, have had to suspend some production and temporarily shut down oil wells. Sheikh Nawaf Sabah, CEO of Kuwait Oil Company, stated that full production recovery after the war could take another three to four months.

The third variable, whether the conflict will become prolonged.

Recently, the US has been increasing troop deployments to the Middle East, and President Trump has even said that he does not rule out occupying Iran’s oil export hub, Kharg Island. Meanwhile, Israel continues to intensify strikes against Iran and Lebanon, and the uncertain prospects of US-Iran negotiations have led many investors to believe that the situation in the Middle East is still escalating. According to The Wall Street Journal, Trump hopes to end the war quickly, but his actions are contrary to that goal.

“Middle East conflict seems to be escalating,” said Byron Caron, analyst at Alpha Investment Partners, in a recent report. He predicted that there is a 25% chance the conflict will end before the end of May, a 45% chance it will be resolved by fall 2026, and a 35% chance it will continue into 2027.

Despite various signs pointing to an escalation, the market has not fully abandoned the short-term expectation that the conflict will end soon. Trump hinted to the media on March 31 that the US-Iran war might end soon. Driven by optimistic expectations, the three major US stock indexes rebounded sharply, and New York crude oil futures prices declined.

Some analysts believe that current market sentiment is overly influenced by short-term conflict news, and market prices have not fully reflected the possibility of a prolonged conflict. Michael Wirth, CEO of Chevron, recently said that actual oil supply shortages are much tighter than futures prices suggest, and the impact of the Strait of Hormuz “blockade” has “not been fully reflected in the oil futures curve.”

If the Middle East conflict causes the blockade of the Strait of Hormuz to last for six months, what level will oil prices reach? A model calculation released by the Oxford Economics Research Institute on March 31 shows that in this scenario, Brent crude oil futures could hit a record high, soaring to around $190 per barrel by August. (End)