Rising tensions between Israel and Iran drive oil prices skyward
Crude oil is rapidly increasing in price due to the escalating conflict between Israel and Iran. Prices have reached their highest level in a year, exceeding $77 per barrel. Investors fear potential attacks on Iranian oil infrastructure and supply disruptions from the region, which could further drive up prices.
Crude oil prices are rising quickly. Brent crude prices approached $78 per barrel on Thursday after a sudden 5 percent jump, marking the fastest one-day increase in nearly a year. American WTI crude prices also surged, reaching close to $74. Over the week, the commodity rose by about 8 percent, the highest weekly increase since the beginning of 2023, according to Bloomberg.
The cause of the sudden hikes is the escalating tensions between Israel and Iran, which have significantly intensified in recent days. Iran launched a massive missile attack on Israel in retaliation for earlier Israeli actions aimed at organizations allied with Tehran, such as Hezbollah.
Concerns about the stability of oil supplies from the Middle East
Oil market analysts point out that the current situation poses a real risk of disruptions to oil supplies from the Middle East. This region accounts for about one-third of the world's crude supply. Iran itself produces approximately 3.3 million barrels of oil per day, making it the third-largest producer within the Organization of Petroleum Exporting Countries (OPEC).
Experts from Citigroup estimate that a major Israeli attack on Iranian export infrastructure could remove up to 1.5 million barrels per day from the market. Losses could range from 300,000 to 450,000 barrels per day even if smaller facilities are hit.
There are also fears that Iran might escalate the situation by attacking energy infrastructure in neighboring countries or disrupting transport through the strategic Strait of Hormuz. We discussed its significance a few days ago. According to analysts from Clearview Energy Partners, interrupting the flow through this narrow waterway off the coast of the Persian Gulf could cause oil prices to rise by $13 to $28 per barrel.
Potential economic impacts of rising oil prices
Significant increases in oil prices could have severe consequences for the global economy. Higher energy commodity prices could contribute to a resurgence of inflation, posing challenges for central banks, including the US Federal Reserve, which recently began easing interest rates.
Options markets are already signaling the possibility of further increases in oil prices. Call options on Brent crude, which gain value as prices rise, have reached their highest premium over put options in a year. Implied volatility has also increased significantly, indicating heightened market uncertainty.
Despite geopolitical tensions, the OPEC+ alliance confirmed its plan to restore some suspended production from December. At the same time, Libya is resuming production after easing its internal political crisis. Indicators in the physical market suggest that market fundamentals remain weak, and it's unclear whether a potential stimulus package in China, the world's largest oil importer, will significantly impact consumption.
Experts don't rule out $100 per barrel
Analysts warn of the possibility of further sharp increases in oil prices as tensions in the Middle East escalate. Experts don't rule out a scenario where the price of crude could exceed $100 per barrel.
President of Rapidan Energy Group's consulting firm, Bob McNally cautions against excessive optimism. "It’s hard to overstate how complacent the oil markets have become," the expert, who previously advised former President George W. Bush on energy matters, stated in an interview with CNN.
Potential escalation scenarios of the conflict
A key factor that could impact oil prices is Israel's response to the recent missile attack from Iran. Helima Croft, global head of commodity strategy at RBC Capital Markets, highlights the risk of Iran "internationalizing" the crisis by attacking oil installations in the region.
According to analysts from ClearView Energy Partners, an Israeli attack on Iranian energy facilities could raise oil prices to $86 per barrel. A susceptible point is the export terminal on Kharg Island, which is responsible for 90 percent of Iran's oil exports.
Kevin Book from ClearView Energy Partners emphasizes the political dimension of the situation. "There are few metrics more likely to impact voter perception of economic well-being than the price of gasoline," the analyst notes. A spike in fuel prices a few weeks before the US presidential elections could significantly impact their outcome.
Experts point out, however, that the market may be underestimating the current risks associated with the situation in the Middle East. "There are only so many times you can play brinksmanship without actually tipping over into a conflict," says one expert in an interview with CNN. Analysts recall that in 2019, an attack on Saudi oil installations, for which the US blamed Iran, led to a sharp rise in oil prices.
