Oil prices are set to rise further after a record monthly gain in March, as contradictory statements from the US on its military build-up in the Middle East and the closure of the Strait of Hormuz stoke fears of a prolonged conflict.
The Iran war, now in its fifth week, pushed oil prices a record 60 per cent higher in March, with prices of $150 or even $200 a barrel not beyond the realm of possibility, according to analysts.
Brent, the benchmark for two thirds of the world’s oil, has been extremely volatile, as traders weigh the latest announcement by US President Donald Trump about his intentions to end the war within weeks.
Brent, which reached an intraday high of almost $120 a barrel on March 19, was trading 0.90 per cent lower at $103.03 a barrel at 1.29pm on Wednesday after climbing above $105 during early Asian trading. West Texas Intermediate, the gauge for US oil, was down by 1.24 per cent at $100.12 a barrel.
The oil swings follow a Wall Street Journal report that Mr Trump is willing to end the military campaign in Iran even if the Strait of Hormuz remains closed.
The US President, who has been critical of Nato countries for not joining the US-Israeli war on Iran, has demanded that allies use their own military might to reopen the strait, or else start buying oil from the US.
Global energy consultancy FGE NexantECA expects oil to surge to $150 or $200 a barrel if the Strait of Hormuz remains closed for the next six to eight weeks.
“Every week, 100 million barrels of oil are not going through, and every month, 400 million barrels are not going through,” the company's chairman emeritus Fereidun Fesharaki told Bloomberg. “So, within a period of time, these losses to the market will be astronomical.”
Analysts from Wood Mackenzie hinted in March that Brent could reach $150 or $200 a barrel in 2026.
The Iranian regime has also been threatening the world of the possibility of oil prices reaching $200 a barrel, with a military spokesperson last month saying the world should “get ready” for such a scenario.
Contradictory statements
Mr Trump on Tuesday said US attacks on Iran could end in two or three weeks, and that Tehran did not have to reach an agreement for the conflict to wind down.
“We'll be leaving very soon,” Mr Trump said at the White House. The exit could take place “within two weeks, maybe two weeks, maybe three”, he added.
He indicated that Iran could still reach an agreement with the US in that time, but that this was not necessary for the war to end. He claimed that the nuclear threat posed by Iran had been eliminated, and that it would take the country 15 to 20 years to rebuild “what we've done to them”.
Mr Trump's latest remarks, which came as the US continued to move troops into the region for a potential ground invasion, exemplified the shifting and, at times, contradictory statements from Washington about how the war might end.
Since the US-Israeli bombing campaign began on February 28, Tehran has also been launching constant attacks on its neighbours in the Arabian Gulf, hitting civilian and energy infrastructure.
Iran has effectively closed the Strait of Hormuz – the narrow passageway crossed by about 20 per cent of the global oil and gas supply – for all but a few ships.
The closure of Hormuz, as well as production disruption caused by strikes on Gulf oil and gas infrastructure, has prompted a global energy crisis. The effects have been felt strongly in Asia and Europe, which depend on the flow of oil and gas from the Gulf to meet their energy needs.
Yemen’s Houthi rebel group, which disrupted commercial shipping in the Red Sea during the Israel-Gaza conflict, have now also joined the war on the side of Iran. The militia has begun launching missile attacks on Israel and could once again choke shipping traffic through the Bab Al Mandeb strait, introducing more disruption to the global flow of energy.
“With just under 15 million barrels a day of Gulf supply offline, rising refinery shutdowns and growing infrastructure risks, we expect Brent to average roughly $125 a barrel in April with credible spikes towards $150,” Bloomberg cited a Societe Generale report as saying. “Prices could go considerably higher if the Bab Al Mandeb at the southern end of the Red Sea is effectively shut.”
Concrete steps
While Washington appears to be looking for an off-ramp and Iran has expressed willingness to stop fighting if attacks on its territory cease, analysts say concrete steps are needed to calm the markets.
“Market participants now largely perceive these diplomatic overtures as tactical verbal interventions, primarily engineered to suppress surging energy costs and provide a synthetic floor for equity markets,” said Samer Hasn, senior market analyst at XS.com.
“The situation on the ground, corroborated by multiple reports, reveals a starkly different reality where the current escalation shows no signs of imminent plateauing.”
Michael Brown, senior research strategist at Pepperstone, agreed. “It’s clearly too soon to be signalling the ‘all clear’ just yet,” he said.
“I remain of the view that market participants will want to see concrete progress towards de-escalation, and not just positive-sounding rhetoric.”
While somewhat cautious tones are expected to prevail for the time being, Mr Brown added, “it’s pretty clear that any inkling of good news will be pounced upon rapidly”.
