Current oil spike does not match market fundamentals

20/06/2025 07:22 AST

The current spike in oil prices as a result of the Iran-Israeli conflict is to be viewed as a temporary phenomenon, as there is no change in oil market fundamentals, analysts say.

"Oil and gas are still flowing out from the Gulf. There are likely to be some consumers seeking to secure supplies in the short term to offset any potential interruption to supply and that is helping to push oil prices higher," Edward Bell, Acting Chief Economist & Head of Research, Emirates NBD, told Khaleej Times.

Oil prices have been the primary market expression of the dynamics of the current Israel-Iran conflict. Oil assets, whether production sites or export infrastructure or ships, have not been directly targeted in the exchange of fire between the two countries but markets are nevertheless pricing in security of supply concerns.

In an immediate reaction to the news of the initial attacks on June 13 oil prices jumped sharply higher. Brent futures spiked to as high as USD 78.50/b and have since been responding to headlines, selling on market indications of a potential diplomatic solution and rising on anticipation that the conflict could deepen or spread.

Volatility in oil prices has surged as markets price in a range of scenarios, all of which seemingly tilt toward the upside, such as attacks on oil infrastructure or the closure of the Strait of Hormuz. Options markets are positioned to the upside by the strongest degree since the start of the Russia-Ukraine war.

Time spreads have also widened sharply into backwardation, reversing what had been an equivocal stance on the near-term outlook for oil market tightness over the rest of this year. "At just shy of $5 per barrel in backwardation, the current 1-6 month time spread for Brent futures are above the 95th percentile of spreads dating back to 1990," a research note from Emirates NBD said.

Oil markets have also generally ignored downbeat economic data this week - a drop in US retail sales and a downgrade to growth from the Federal Reserve. Correlation with the US dollar has turned negative in the last several days after oil and the greenback had generally been moving in tandem for much of 2025.

Oil and the dollar had been trading on a weak global growth narrative for the last few months thanks to the uncertainty caused by the tariffs introduced by the Trump administration. "But now the geopolitical risk in the oil market is splitting the outlook for oil and the dollar, creating an even worse environment for central banks who will have to contend with slow growth and potentially even higher inflation," Bell said.

Geopolitical anxiety, if it does not result in actual supply disruption, tends to burn hot in oil markets but also burn fast, Bell said. "Even the attacks on the Abqaiq oil processing facilities in 2019 saw a spike in oil from $60 per barrel to almost $70 per barrel in a single day but gains then faded over the subsequent weeks. Oil markets are accustomed to geopolitical risk and there is slack available in the market to absorb at least some of the anxiety over supply security," he added.

Spare capacity within OPEC+ is estimated at around five million barrels a day, though with the caveat that much of that capacity is reliant on access to the Strait of Hormuz to make it out to seaborne markets. For now there has been no material interruption to shipping in the Gulf region. "Since June 13 there has been a steady stream of departures from UAE oil export terminals," Bell noted.

Higher volumes with lower oil prices was going to result in wider fiscal deficits or smaller surpluses for GCC governments. "If oil prices hold to their current levels and OPEC+ sticks with its higher output targets that should mean a better picture for regional balances," Bell said.

Khaleej Times