Oil Prices Shot Up This Week. How High Will They Go?

The only truly predictable thing about predicting oil prices is that they are stubbornly unpredictable. Anyone able to accurately and consistently predict the direction of oil prices would soon become a billionaire by trading in the commodity.

I learned that lesson for about the 100th time this week when, one day after I wrote a piece about the potential price-depressing impacts from an apparent shift in strategic direction by Saudi Arabia on October 1, oil prices began shooting up in the wake of Iran’s decision to launch a ballistic missile attack into Israel. As of this writing on the morning of October 4, the international Brent price for crude oil is up 11% for the week and still rising in Friday trading.

Oil markets have remained unusually stable over the past year since the October 7, 2023 attacks by Hamas on Israel, mainly due to the lack of any threat to the free flow of oil out of the Persian Gulf. But the prospect of Israel launching a major retaliation that would target Iran’s oil production and export infrastructure has traders on higher alert.

Where will oil prices go from here? As always, that is anyone’s guess, and guesses are the only things available to us. Prices will rise or drop based on a wide variety of factors, including the following:

Will Israel retaliate, and what would such a countermove look like? – Israel’s Prime Minister, Benjamin Netanyahu, vowed to retaliate directly against Iran in the wake of the missile attack, saying his government will adhere to “the rule we established: Whoever attacks, we will attack them.”

Should Israel decide to strike at Iran’s refining and export infrastructure, oil prices would almost certainly rise significantly.

Would OPEC+ respond by raising exports? – It is certainly possible, perhaps likely that some or all OPEC+ participants would respond to a major disruption in Iranian exports by increasing their own export volumes to fill the gap. While many OPEC+ members would like to see prices rise back up into the $90/barrel range – a $12/barrel increase from Friday’s opening level – a major price spike to higher levels could have long-term demand killing impacts that the cartel wishes to avoid.

Will rising crude prices further slow economic growth in China and other major importing countries? – One reason OPEC+ would likely seek to fill any major gap in Iranian supplies is the probability that a major price spike would further slow economic growth in China and across the rest of the world, thus further slowing oil demand growth.

What others are saying. – Daan Struyven, co-head of global commodities research at Goldman Sachs, told the hosts of CNBC’s Squawkbox Asia program Friday morning, “If you were to see a sustained 1 million barrels per day drop in Iranian production, then you would see a peak boost to oil prices next year of around $20 per barrel,” adding that price impacts would be less significant should OPEC+ step in to fill some of the gap.

Iran’s exports have topped 3.2 million barrels per day (bpd) in 2024, their highest levels since 2018, as the US and global community have eased sanctions invoked during the Donald Trump administration. Obviously, a major Israeli strike that shuts down Iran’s ability to export onto the global market would send oil prices soaring. But Amrita Sen, co-founder of Energy Aspects, told Reuters this week that, “In theory, if we lost all Iranian production – which is not our base case – OPEC+ has enough spare capacity to make up for the shock.”

Andy Critchlow, EMEA head of news at S&P Global Commodity Insights, told CNBC’s Street Signs Europe hosts that OPEC claims to have roughly 5.6 million bpd in excess capacity, with Saudia Arbia controlling most of that volume. “These are dangerous times for oil markets at the moment,” Critchlow said, “It’s hard for anyone in the market to really gauge the direction when you look at the amount of geopolitical risk that is out there.”

The Bottom Line

Critchlow’s final comment really summarizes the bottom line on this situation: Many experts like those quoted here have keen insights to offer, and many observers have informed opinions on the future direction of oil prices. But the only thing we really know for sure about the question is that no one really knows for sure.