Immediately after Israel attacked Iran earlier this month, crude oil prices spiked up—exactly like you'd expect with a war that threatens oil supplies.
The price increase was substantial: 7% within a few hours. But at the same time, it wasn't the kind of meteoric rise that would signal that the world could be headed for an oil crisis. Prices hit $80 per barrel at their peak this month. That's still lower than they were in January.
"We saw a lot of people … saying, 'Why isn't crude reacting more?'" says Rebecca Babin, a senior energy trader at CIBC Private Wealth. After all, Iran is one of the world's ten biggest oil producers, and it has threatened to block the Strait of Hormuz and restrict even more oil from flowing.
Oil prices continued to go up and down as the conflict extended, and rose again over the weekend after the U.S. got involved. But then, as Iran did not block the Strait or otherwise interfere in the oil trade, prices started to drop—and swiftly. Even before a ceasefire was announced, prices trended down.
Now, crude oil prices are actually lower than they were before Israel attacked.
"The market has shown that it's been very resilient to some of the geopolitical shocks that historically would have sent prices skyrocketing," says Angie Gildea, U.S. energy lead for the accounting giant KPMG. "We didn't see that much with Russia-Ukraine, and we haven't seen that with Israel-Hamas. And we're certainly not seeing that in this case."
Here are five reasons why the Iran conflict hasn't caused a crisis.
Iran has not targeted oil supplies
The big concern for the oil market was the possibility that Iran would close the Strait of Hormuz, through which about 20% of the world's oil supply passes, or otherwise stop oil from flowing to markets.
Such a disruption to oil supplies would be a major development. Despite efforts to pivot to other sources of energy to fight climate change, the global economy runs on oil—more than 100 million barrels per day, and increasing. A sudden drop in supply would send prices up, with ripple effects worldwide.
But so far, Iran has declined to block the Strait, and analysts think the prospect is unlikely at this point—in part because of the intense economic pain it would cause Iran.
Oil traders have learned to be skeptical of spikes
Even in the absence of any actual hit to supply, there was a time when just the possibility of it might have pushed prices up to eye-watering levels—oil markets often respond to fear as much as to reality. But Babin says that traders have learned to be cautious, based on what happened with oil prices after Hamas attacked Israel, or when Israel attacked Iran last year, or at other times when tensions have mounted.
"Throughout all the other geopolitical events that have happened over the last several years, we get these spikes and then supply is not impacted and they revert very quickly," she says.
It's like the story of the boy who cried wolf: Markets keep signaling there's a reason to panic, but as the threat fails to materialize again and again, the response is diminishing.
Autumn is approaching (in the world of oil)
The summer solstice may have just passed, but oil contracts work on a different calendar.
"The buyers of crude oil are now buying for August and beyond," explains Susan Bell, senior vice president of commodities analysis at Rystad Energy. "And that starts to move them into the lower demand season … where prices should actually start softening."
Oil demand tends to go down when it's autumn in the Northern Hemisphere. That's also taken some pressure off.
The world just has too much oil
Oil analysts call it "the fundamentals" of the oil market: supply and demand, how much of the stuff the world needs and how much it makes. Lately, demand has been growing slowly, thanks in part to an underwhelming Chinese economy. Supply, though, has been booming, in part because OPEC and its allies keep putting more barrels on the market.
The market is oversupplied. That pushes prices down – and it means there's less panicking about something that could potentially cut into supplies.
The U.S. is the world's dominant oil producer
Last but not least, the geopolitics of oil have been transformed over the last decade. The shale revolution – when newer technology like fracking unlocked more oil from U.S. oil fields – lessened the world's dependence on crude from the Middle East.
Today, the U.S. is the world's largest producer of oil, as well as the largest consumer.
"The impact on the oil market is profound," says Jim Burkhard, who heads crude oil market research for S&P Global. "It is among the most important factors why the response in the oil market to geopolitical conflict in the Middle East is limited and often disappears once the fear of a potential disruption dies down."
It's not just that the U.S. produces a lot of oil; it's also that the U.S. can produce a lot more shale oil quickly, allowing a rapid response if there was a major supply disruption that led to a prolonged price hike.
The power of U.S. production was what President Trump alluded to this week when he repeated his call for producers to "drill, baby, drill." But in the U.S., where companies produce oil, not the government, the scale of production isn't dictated by politicians, but by the market.
And that market, again, is oversupplied. Burkhard is skeptical that any U.S. boom is coming.
"We think – we've been saying for the last few months – U.S. production is going to decline," he says.
The market is telling oil producers to chill, baby, chill, at least for now.
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