Supply Threatened? See What It Could Do to Oil Prices!
Oil surged after Israel and Iran continued to attack each other over the weekend, with markets bracing for an escalation that could disrupt supplies from a region that produces about a third of the world’s crude.
Brent rose as much as 5.5% before paring some gains to trade below $76 a barrel, while West Texas Intermediate neared $74. Israel launched an attack on the giant South Pars gas field, forcing the shutdown of a production platform, after attacks on Iranian nuclear sites and military commanders last week.
The escalating tensions have rattled financial markets, with oil surging more than 13% on Friday before easing, and investors seeking safe havens such as gold. Iran canceled scheduled nuclear talks with the U.S. in Oman on Sunday after the Israeli strikes.
The Israeli strikes on South Pars triggered a massive explosion and fire at a gas processing plant on Saturday, the semi-official Tasnim news agency reported. Iran’s gas is primarily for domestic use and is not widely exported, with the fields providing about two-thirds of the country’s supply, although a type of oil known as condensate is also produced and exported.
While an attack on Iran’s gas production infrastructure is a concern, the biggest fear for oil markets centers on the Strait of Hormuz. Middle Eastern producers send about a fifth of the world’s daily output through the narrow waterway, and prices could spike even further if Tehran tried to block the route.
“A potential Iranian blockage of the Strait of Hormuz remains the most important market-moving event to watch, which could push oil markets into unprecedented territory,” Rystad Energy AS analyst Mukesh Sahdev said in a note. “There is no sign yet that such a scenario is imminent.” However, closely watched market metrics are showing panic over the risk of rapid supply cuts, as well as growing concerns about a prolonged conflict in the Middle East. The gap between the two nearest December contracts for the grade, a key indicator of long-term balances, rose as much as $1.29 a barrel to $3.48.
The options market is also showing warning signs, with the bias remaining bullish in Asia as volatility remains high. Volumes are also much higher than usual.
US President Donald Trump said he believes there is a chance Israel and Iran can reach a deal to end the conflict, but may need to continue fighting before reaching a deal. "Sometimes they have to fight, but we'll see what happens," he told reporters at the White House on Sunday.
So far, Iran's oil export infrastructure has remained unscathed, but the hostilities have caused prices to claw back all their losses for the year. Concerns over the impact of Trump's trade policies, and a rapid increase in production quotas by OPEC+ have weighed on futures.
Brent for August delivery rose 2.0% to $75.68 a barrel at 7:58 a.m. in Singapore after closing 7% higher on Friday.
WTI for July delivery rose 2.0% to $74.42 a barrel.
Source: Bloomberg
