Oil Prices Poised for Volatility Amid Middle East Conflict and Shifting Market Dynamics

Oil prices slid by $2 in early Asian trade on Tuesday as a combination of geopolitical tensions and revised demand forecasts unsettled the market. This downturn came on the heels of OPEC lowering its outlook for global oil demand growth for both 2024 and 2025, coupled with a media report suggesting that Israel might target Iranian military installations rather than nuclear or oil assets in the wake of ongoing regional tensions.
By 12:45 GMT, Brent crude futures were down by $2.11 (2.7%) at $75.35 per barrel, while U.S. West Texas Intermediate (WTI) crude futures declined by $2.07 (2.8%) to $73.76 per barrel. Both benchmarks had already closed 2% lower on Monday, reflecting the volatility permeating global oil markets.

Geopolitical Tensions Weigh on Market Sentiment
The prospect of escalating conflict in the Middle East, particularly between Israel and Iran, continues to cloud the oil market's near-term outlook. A recent report revealed that Israeli Prime Minister Benjamin Netanyahu had communicated to the U.S. that any potential Israeli military strikes on Iran would focus on military targets, steering clear of oil or nuclear sites. The region's instability has historically influenced energy prices, and with Israel now openly discussing military options, the market is likely to remain on edge.
Middle East tensions have traditionally been a potent driver of oil prices, given the region's status as a critical hub for global oil production and transportation. While the latest Israeli reports may reduce immediate concerns about direct oil supply disruptions, the threat of broader regional instability remains a significant risk factor for energy markets. The ripple effects from a potential military conflict in the region could extend beyond immediate production concerns, potentially influencing investor sentiment and energy flows across global markets.

Citi Research's Dual-Scenario Outlook
Despite the recent dip in prices, oil prices are expected to rebound in the coming months, driven by potential supply disruptions and persistent geopolitical risks. Citi Research raised its bull case scenario for oil prices for the final quarter of 2024 and the first quarter of 2025. The bank now forecasts prices reaching as high as $120 per barrel, up from an earlier estimate of $80 per barrel, citing heightened risks of supply losses due to the escalating Middle East conflict. This scenario reflects the market’s increasing fear that the situation could worsen, threatening critical oil supplies and driving up prices.
Nevertheless, Citi maintains a more conservative baseline forecast for Brent crude, expecting it to average around $74 per barrel in the fourth quarter of 2024 and $65 per barrel in the first quarter of 2025. This outlook is grounded in the bank’s assessment of weak underlying oil market fundamentals, including sluggish global demand and ample supply, which could temper any prolonged price surges.
At the same time, Citi is also holding onto its bear scenario, which sees oil prices potentially plunging to $60 per barrel in Q4 2024 and $55 per barrel in Q1 2025. This bearish outlook assumes that OPEC+ will raise production starting in December, coupled with a reduction in oil supply risks. While this scenario carries a 20% probability, it suggests that the oil market could swing in either direction depending on how the geopolitical situation evolves.

Historical Perspective on Geopolitical Risk
While the possibility of a significant price hike looms due to geopolitical tensions, Citi Research also points out that past geopolitical risk events impacting oil supply have rarely persisted for more than a few quarters. Since the 1950s, episodes of potential or actual supply disruptions have typically led to short-term price spikes, but these have not generally resulted in sustained long-term increases. This historical perspective underscores the importance of monitoring developments in the Middle East while keeping an eye on underlying market fundamentals.

Oil Prices Likely To Continue Swinging
Despite the recent slide in oil prices, the market remains primed for significant volatility, with multiple factors contributing to the uncertainty. The ongoing geopolitical tensions between Israel and Iran, coupled with Citi Research’s heightened bull case for oil prices, suggest that the possibility of an upward surge is real, particularly if the Middle East conflict deepens. At the same time, OPEC’s lowered demand forecast and weak underlying fundamentals could temper the scope of any price rally.
In the near term, oil prices are expected to swing between optimism and caution, as investors balance the risks of geopolitical shocks against softer market fundamentals. Should regional instability escalate or supply concerns intensify, oil prices may surge toward Citi’s bull case scenario of $120 per barrel. Conversely, if tensions ease and OPEC+ increases production, the market could see prices retreat toward the bank’s bearish outlook. Either way, the road ahead for oil looks set to be marked by continued volatility.