Oil prices experienced significant gains on Monday, with Brent crude exceeding $81 per barrel during the US afternoon trading session. This increase is largely driven by ongoing geopolitical uncertainties in the Middle East. Specifically, West Texas Intermediate crude oil saw an increase of 4%, reaching $77.37 per barrel, while Brent crude surged by 3.9% to settle at $81.11.
The recent rise in Brent prices marks the most substantial jump since early 2023, according to insights from D.A. Davidson. The escalating tensions follow a missile attack carried out by Iran on Israel, a retaliation for the recent killing of Hezbollah chief Hassan Nasrallah and an Iranian commander in Lebanon.
This retaliation has intensified market anxieties surrounding potential future actions, particularly concerning the risk of an Israeli counterattack. Industry experts, including Ole Hansen, Head of Commodity Strategy at Saxo Bank, highlight that oil prices are likely to sustain upward momentum, especially if Israel opts to strike Iran’s oil and gas industries.
Such actions could lead to tightened supply, exacerbating the already precarious situation in the region. Hansen elaborated on the potential scenarios that might unfold in the wake of an Israeli counterstrike on Iran. He emphasized that an attack on Iran's refinery assets could lead to an immediate price spike, but, paradoxically, might also initiate a subsequent decline in crude oil prices as Iranian exports might surge due to limited storage capacity.
Notably, China, Iran's primary purchaser of refined products, may utilize its reserves, helping to cushion significant price spikes in gasoline and diesel. Furthermore, the Saxo report anticipates that a direct assault on Iran's oil production infrastructure could elevate prices by an additional 5% to 10%.
In contrast, should Israel decide to delay its military operations or target sectors outside of oil and gas under pressure from the US, a possible price drop of 10% could occur as the focus shifts back to weak global demand, particularly in China. A significant disruption in oil and gas flows through the Strait of Hormuz—crucial for global oil transit—has the potential to impact nearly 30% of the world supply.
Such disruptions could propel oil prices temporarily to $100 per barrel or more, increasing the likelihood of market reactions such as tapping into strategic reserves and ramping up production from countries that have excess capacity, according to Hansen's analysis. In related news, an Israeli airstrike in a border area of southern Lebanon resulted in the tragic death of at least 10 firefighters, as reported by the Lebanese health ministry.
This incident highlights the high human costs associated with the ongoing conflict. US President Joe Biden reaffirmed America’s support for Israel's right to defend itself against threats from Iran, Hezbollah, Hamas, and the Houthis. He noted, "Last week, at my direction, the (US) military once again actively assisted in the successful defense of Israel, helping to defeat an Iranian ballistic missile attack.
We will not stop working to achieve a ceasefire deal in Gaza that brings the hostages home, allows for a surge in humanitarian aid to ease the suffering on the ground, assures Israel's security, and ends this war." When questioned by reporters regarding US support for an Israeli strike on Iranian oil facilities, Biden responded, "we're in discussion of that." As the situation unfolds, investors should remain vigilant and closely monitor developments that could influence the oil market and global geopolitical stability..