In an area rich in petroleum resources, intense fighting is taking place. However, after several days of anxiety following the violent attacks by Hamas militants in Israel on October 7, energy markets are on the decline. The international oil benchmark, Brent crude, is currently selling for around $80 a barrel, cheaper than when the fighting began.

One reason prices aren’t higher, analysts say, is that despite the fierce fighting, there has been minimal disruption to petroleum supplies, leading traders to believe there is no immediate threat.

Richard Bronze, head of geopolitics at Energy Aspects, a London-based market research firm, stated, “While traders realize there is an increased risk, that hasn’t led to a lot of precautionary buying.”

According to Raad Alkadiri, managing director for energy and climate at Eurasia Group, a political risk firm, the markets are effectively dismissing the possibility that anything could go wrong in the Middle East.

Mr. Alkadiri said that traders are unlikely to bid up prices unless they see “actual barrels removed” from the market.

Waning Demand in Focus

The market appears to have ignored the war and is once again dominated by concerns about future petroleum demand, mainly focusing on economic concerns such as those about China, the largest oil importer, and other major consumers. Saudi Arabia and other producers have been attempting to support prices by reducing their oil output.

Forecasters are warning that 2024 could be a challenging year in the oil markets. The U.S. Energy Information Administration predicted this week that gasoline consumption in the United States would decline next year due to reduced commuting and the increasing use of electric cars and more efficient vehicle engines.

The pessimistic sentiment drove down prices sharply before the Israel-Hamas conflict and it appears to be weighing on the market once again, despite the risks of a broader war.

Haves and Have-nots

As the fighting continues, traders are learning that when it comes to oil, there are ‘haves’ and ‘have-nots’ in the Middle East. Gaza produces no oil and Israel little. For there to be a major disruption in supply, the war’s impact would need to spread to the massive oil fields of Saudi Arabia, Iraq or Iran.

During the early stages of the conflict, Iran’s foreign minister called for an oil embargo against Israel, but given concerns about climate change and their dependence on oil for revenues, any such move would risk backfiring on countries that imposed the ban.

“The risk to supply is very unlikely to come from an independent decision to curtail oil sales by Iran or OPEC,” said Eurasia Group in a recent note.

The Remaining Risks

A disruption is not inconceivable. Four years ago, a missile attack on a key Saudi facility temporarily knocked out about half of the kingdom’s oil production.

In an extreme case, Iran could try to block the Strait of Hormuz through which huge volumes of oil flow to the rest of the world. “I still think that there is considerable risk that this spreads,” said Helima Croft, head of commodities at RBC Capital Markets, an investment bank.

Ms. Croft attributes what could seem like complacency about the impact of the war in part to traders having lost money when prices surged to above $120 a barrel following Russia’s invasion of Ukraine, but then quickly fell.

“The market just has no attention span for these kinds of issues anymore,” she said.

Ms. Croft, a former analyst at the Central Intelligence Agency, said that the seeming success of the early days of the 2003 invasion of Iraq by U.S. forces instead led to a conflict, indicating that we could still be caught by a nasty surprise in the Middle East.

The Biden administration is actively engaged in trying to prevent an escalation of the war. Regional oil powers, including Iran, would also prefer to keep tanker traffic moving through the Persian Gulf.

“It’s likely the conflict remains contained and doesn’t spill over into the big oil producers in the region or the key shipping lanes,” said Mr. Bronze of Energy Aspects. “The risks are more from miscalculation and misjudgment,” he added.