The recent fighting in the Middle East has had a similar impact on oil prices as the 2006 invasion of Lebanon by Israel. However, the current situation is far more severe, with reports of exploding walkie-talkies, assassinations of Hezbollah and Hamas leaders, and a barrage of Iranian ballistic missiles hitting Tel Aviv.
Despite the heightened tensions and the threat to oil supply, the oil market’s reaction has been relatively muted. The “war premium” is smaller, and it fades away faster than it once did. This is part of a wider trend in financial markets, where volatility is generally lower.
The reasons for this muted response are multifaceted. The United States is now the world’s largest oil producer, reducing its dependence on Middle Eastern petroleum. Additionally, the institutional memory of trading desks has shifted, with younger traders having little firsthand experience of long-lasting Middle East oil supply shocks. Instead, the recent disruptions have been the result of consumer choices, such as sanctions against Iran, Venezuela, and Russia.
Even if the market were to price in a worst-case scenario, the impact would be significantly greater than the current 10% price jump. This suggests that traders are taking a more sanguine view of the geopolitical risk, perhaps believing that “this time is different.” However, the potential for a more severe disruption remains, and the situation in the Middle East continues to be closely monitored.
