Escalating tensions in the Middle East, as a result of Israel’s war with Hamas that still rages centered on Gaza, is the main reason that oil prices have not continued their downward trend in recent weeks. The price of Brent is around 78 dollars a barrel, while it had fallen before Christmas to 70 dollars.

According to analysts’ estimates, the large increase in crude production, mainly from the US but also from other countries, combined with the slowdown in demand growth creates the conditions for a surplus in the global oil market and for a reduction in prices.

The inability of OPEC and its allies (OPEC+) to hold prices was evident after its latest attempt in late November for an additional supply cut of 900,000 barrels per day from January 1, 2024.

The decision came after disputes, which led to Angola’s withdrawal from OPEC, without convincing the market that it can avert the prospect of a surplus. Many analysts believe that the newly announced reduced quotas are likely not to be met and in such a case there could be a free fall in prices.

Oil prices fell 10% in 2023, falling for the first time since 2020 and after hitting record highs following Russia’s invasion of Ukraine. Investors’ bets for a price increase in 2023 were the lowest since 2011, while another indicator confirming the market’s bearishness is that prices are lower for short-dated contracts than for longer-dated ones.

All of these forecasts, however, are conditional on the unrest in the Middle East not leading to a general conflict that would drastically hit supply from key oil-producing countries in the region. For some analysts, the possibility of such an eventuality remains small, but it is clear that the escalation of tension in recent days is very large and therefore worrying.

The ongoing attacks by Yemen’s Iran-backed Houthi fighters against merchant ships transiting the Red Sea bound for Europe is a particular source of concern. This is because it has forced many major shipping companies to take the much longer and more expensive route through South Africa, resulting in large increases in freight rates and delays in the delivery of cargoes of oil and other commodities.

The international naval force set up at the initiative of the US to patrol the Red Sea region and protect passing ships has so far not stopped the Houthi attacks, despite the fact that it has shot down a large number of their drones and missiles, as admitted by the head of the American force. This fact has intensified the pressure of the West against the Houthis with a joint statement by 12 countries warning them of their responsibilities if they continue the attacks. At the same time, the US has put on the table the possibility of attacking Houthi bases in Yemen, according to statements by a British official.

The Houthi attacks are part of a wider crisis, with the participation in the Israel-Hamas war and other military organizations supported by Iran, such as Hezbollah in Lebanon. The two major explosions in Iran, with dozens dead and hundreds injured, in recent days, as well as the killing of the deputy leader of Hamas in his home in Beirut by an Israeli strike, and the explosions at an Iranian base in Iraq have dangerously escalated the tension.