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Iran’s attack on Israel over the weekend has increased the likelihood of oil reaching $100 per barrel and potentially complicating efforts by central banks and politicians to rein in persistent inflation, analysts said.
Brent, which closed up 0.79 per cent at $90.45 per barrel on Friday, has already been rising on concerns of the geopolitical tensions worsening in the Middle East.
Iran fired more than 300 drones and missiles at Israel on Saturday in retaliation for the killing of senior members of Iran's Revolutionary Guard in an air strike in Syria on April 1.
It marks the first direct attack by Tehran on Israel rather than through proxies in Lebanon, Syria, and other locations. Iran also seized a container ship with links to Israel in the Arabian Sea.
Oil prices surged in the wake of the Syria strike, with Brent climbing above $90 a barrel for the first time since October due to traders' concerns about potential retaliation from Tehran.
“The chances of $100 a barrel, which was already in sight over the next few months, has now increased and the timing has moved forward, in the current state of geopolitical risks,” Iman Nasseri, managing director Middle East at FGE told The National.
Brent crude, the benchmark for two thirds of the world’s oil, has gained about 17 per cent since the beginning of the year on geopolitical risks, Opec+ extending its supply cuts and expectations of robust fuel demand during the summer months.
While a potential disruption of Iranian crude shipments will affect oil prices, the biggest risk to energy markets comes from a possible blockage of the Strait of Hormuz, the world’s most important oil bottleneck, analysts said.
About 30 per cent of global oil trade transits the Strait of Hormuz, with 70 per cent going to Asia, according to the International Energy Agency.
Tehran has previously indicated it could close the maritime route if necessary.
“It's still unlikely, in my opinion, for Iran to close the Strait of Hormuz as it will have much wider implications for the region and the world and is some sort of calling for a war with the West and Middle East neighbours,” Mr Nasser said.
“But it will have serious implications for the energy markets and if it were to happen, major powers will certainly get involved to open the energy choke point within weeks if not days.”
Iran’s mission to the UN said the attack would be “deemed concluded” if Israel doesn’t strike back. The Islamic Revolutionary Guard Corps warned it would retaliate against the source of any attack from any country in the region.
“I wouldn’t assume a retaliatory attack by Israel on Iran as a certainty. Suddenly, the stakes are much higher – for the US as well as for the Arab countries – to double down on efforts to de-escalate the tensions,” Vandana Hari, founder of Vanda Insights, told The National.
“Any further escalation risks pushing the Middle East into a full-blown regional war, jeopardising the entire region’s oil and gas supply,” she said.
“The US’ military involvement is the worst-case scenario, and I expect that will be averted.”
Trade flow disruptions
Oil production in the Middle East amounted to about 30.7 million barrels per day in 2022, accounting for about a third of the global crude output.
The threat to oil exports in the Strait of Hormuz comes as several major energy companies and ship operators are already avoiding the Red Sea due to attacks by Yemen’s Houthi militant group.
Trade flow disruptions caused by the Red Sea attacks boosted bunker fuel use, and longer shipping routes and faster vessel speeds saw Singapore bunkering reach highs, the agency said in a report last month.
“Disruption in the Middle East is likely to remain contained to shipping in the Red Sea … rather than a lasting blockage of the Strait of Hormuz or major disruption to oil production and transport out of Iran, Saudi and the rest of the GCC,” said Hasnain Malik, emerging and frontier markets equity strategy at Tellimer.
“Global demand and supply is likely more important than geopolitical risk for the foreseeable future.”
The agency this month revised its prediction for oil demand growth this year, citing lower-than-expected consumption and a decline in industrial activity in Organisation for Economic Co-operation and Development member countries.
Demand for 2024 was adjusted to 1.2 million bpd, about 100,000 bpd lower compared to March's estimates.
However, Opec has held firm to its forecasts for global oil demand and economic growth in 2024 and 2025, with expectations of “robust” summer months for the crude market.
The group has forecast oil demand growth of 2.2 million bpd for this year and 1.8 million bpd for 2025, sticking to its estimates since February.
“There is some geopolitical risk premium already in the price and the events overnight are still relatively contained. So prices may stay above $90 but not expecting a significant jump,” said Amrita Sen, co-founder and head of research at Energy Aspects.
“They may even retrace if the market believes the situation will not flare further and we have long said no oil supply is at risk. That said the situation is still fluid so nothing can be ruled out,” she said.
Inflationary pressure
A significant increase in oil prices will raise the possibility of prolonged inflation.
US inflation increased again last month, frustrating hopes that the US Federal Reserve will cut interest rates in June and also signalling higher-for-longer rates in the UAE and Saudi Arabia.
The Consumer Price Index rose 0.4 per cent in March, unchanged from its monthly gain in February, the Labour Department reported. But it rose annually at 3.5 per cent, a larger increase than the 3.2 per cent yearly rise in February.
“This report highlights the challenges in reducing inflation, which continues to strain household budgets. It also suggests that any easing of monetary policy, like lowering interest rates, is unlikely to happen soon,” the National Bank of Kuwait said.
“The data significantly impacted expectations for Federal Reserve interest rate adjustments. Analysts predict that a rate cut in June is highly unlikely,” the bank said.
