The oil market remained tense following its largest single-day increase in nearly a year, driven by concerns that Israel might retaliate against missile attacks by targeting Iranian oil facilities. Brent crude was priced under $78 (£56.48) per barrel, following a 5% surge upon President Joe Biden’s statement hinting at the possibility of US support for Israeli retaliation on Iran’s oil infrastructure. A US representative, however, clarified that no final decisions had been made after a discussion with Israel. West Texas Intermediate maintained a value close to $74.
Oil value saw a climb of about 8% over the week, a spike not seen since early the previous year, as the growing conflict heightened fears of a potential disruption to Middle East oil supplies. The standoff between Israel, Iran, and Iran’s proxies in various locations over the past year has fuelled worries about a larger-scale war involving other nations.
“Concerns are rising that Israel might cripple Iran’s oil production, creating a significant financial impact,” commented Vishnu Varathan, Mizuho Bank’s Asian Chief of Economics and Strategy. Despite the swell in prices, an all-out conflict is yet to be factored in, he added.
Earlier this week, Iran initiated a missile attack on Israel in response to the latter’s increased aggression towards Hezbollah, an Iran-supported group. This action included deploying Israeli forces in South Lebanon. The Group of Seven has urged regional countries to act prudently and exercise restraint.
The Middle East is responsible for nearly one-third of global crude supply, with Iran contributing over 3.3 million barrels daily, being the third-largest exporter in the Organization of the Petroleum Exporting Countries. An estimation by Citigroup Inc suggests that a significant Israeli attack on Iran’s export facilities could lead to a supply reduction of 1.5 million barrels daily. A minor strike, alternatively, could result in a loss of 300,000 to 450,000 barrels.
The possibility of Iran escalating matters by targeting energy infrastructure in adjacent countries or critical supply routes like the Strait of Hormuz is also causing unease. Clearview Energy Partners speculates that an obstruction of oil movement through the narrow waterway, located at the Persian Gulf’s entrance, could cause oil prices to shoot up by $13 to $28 per barrel.
A significant increase in oil prices could potentially feed into a revival of inflation just as important central banks, such as the Federal Reserve, have begun to relax interest rates following a slowdown in the rate of price increases.
The options markets are raising alarms, with investors predicting a possible further increase in oil prices. Brent call options, which profit from surges in prices, were at their highest premium compared to the contrary puts in a year, as of the end of trading on Thursday. A notable jump in implied volatility has been observed as well.
Beyond the current crisis, the alliance of OPEC+ has consented to a plan to commence reinstating some previously closed capacity from December onwards, while in Libya, production has resumed following the easing of political conflicts within the nation.
Despite these developments, indications from the physical market suggest a vulnerable backdrop persists and it remains uncertain if a major economic stimulus package by China will significantly affect consumption in the largest importing country in the world.