Oil climbs while US stock futures dip as Israel-Iran conflict continues

Investors fear escalation could spill into region, disrupting global energy supplies

A refinery in the South Pars gas field in Bushehr, Iran, after it was struck by an Israeli drone. AP

Oil prices rose on Tuesday while US stocks slumped further as the Israel-Iran conflict stoked fears that an escalation could spill into the Gulf region, choking global energy supplies.

Iran and Israel's air war, which began on Friday when Israel attacked Iran's nuclear facilities, has dented the mood of investors as they also await an interest decision by the US Federal Reserve.

Brent, the benchmark for two-thirds of the world’s oil, was trading 2.25 per cent higher at $74.88 a barrel at 4.17pm on Tuesday, extending oil’s advance since hostilities started to more than 7 per cent. West Texas Intermediate, the gauge that tracks US crude, jumped 2.09 per cent to $73.27 per barrel.

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Oil prices could surge to as much as $120 a barrel if the attacks by Iran halt traffic in the Strait of Hormuz, a gateway for about a fifth of the world’s daily output, according to analysts.

“While Iran appears to be signalling restraint, US President Donald Trump urged the evacuation of Tehran, and Israel has vowed to continue its strikes,” said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank. “This makes it a one-sided de-escalation at best, and keeps risks across energy markets and haven assets tilted to the upside. If Iran fails to find room to manoeuvre diplomatically, it could easily make a U-turn.”

The upside for oil appears limited as the market remains well-supplied, with the US pumping crude oil at record levels and Opec+ adding hundreds of thousands of barrels back into the market, Ms Ozkardeskaya added.

“Yet global energy supply remains fragile and it wouldn’t take much to shake the physical flow of oil and reverse market sentiment in a heartbeat,” she said in a note to investors.

As Israel and Iran continued to trade attacks, President Trump left the G7 leaders’ meeting in Canada early to deal with the crisis. Though he has not outlined what comes next, Mr Trump told reporters aboard Air Force One he was looking for “a real end, not a ceasefire” to the conflict.

“Everyone should immediately evacuate Tehran,” Mr Trump said in a post on his Truth Social platform on Monday.

“Iran should have signed the 'deal' I told them to sign. What a shame, and waste of human life,” he wrote.

The nuclear talks, which Mr Trump has accused Iran of “slow-walking”, have stalled amid the conflict.

South Pars gas field

Separately, Qatar said on Tuesday that its gas production at Iran’s South Pars field is steady and supply is proceeding normally, after the world's largest gas field was struck by Israel on Saturday.

Iran partially suspended production at South Pars, which it shares with Qatar.

Qatar is the world's third-biggest liquefied natural gas exporter after the US and Australia.

“So far, gas supplies are proceeding normally. However, the ill-advised targeting raises concerns for everyone regarding gas supplies,” Qatar's foreign ministry spokesperson Majed Al Ansari said, according to Reuters.

“This is a reckless move … The companies operating in the fields are international, and there is a global presence, especially in the North Field,” he said during a weekly press briefing in Doha.

Stock futures and Fed decision

While energy markets remain volatile, global equities have recovered from the knee-jerk reaction after Israel began its military campaign last week.

S&P 500 futures, which track the S&P 500 stock market index, slid 0.34 per cent, while Dow Jones futures dropped 0.39 per cent and Nasdaq futures declined 0.36 per cent.

Global equity investors are monitoring the Fed's monetary policy decision on Wednesday, when interest rates are widely expected to remain unchanged. Traders are pricing in two cuts by the end of the year.

“While no change in Fed rates is expected, geopolitical uncertainty and trade tensions make the outlook more complex. Recent inflation data has been reassuring – suggesting price pressures are not accelerating – but tariffs and the risk of an oil price spike due to Middle East tensions will likely keep the Fed in a cautious stance,” according to Ms Ozkardeskaya.

That said, markets could still react strongly to even a hint of dovishness from the Fed this week, she said.

“Investor positioning and sentiment suggest a clear appetite to push the S&P 500 to fresh all-time highs. But with little fundamental support behind the current risk rally, much of it appears to be driven by FOMO – the fear of missing out,” she added.

Haven assets

Spot gold was up 0.1 per cent to $3,386.29 an ounce on Tuesday. Zero-yield bullion is considered a hedge against geopolitical and economic uncertainty and tends to thrive in a low-interest environment.

The gold market’s reaction to the escalating conflict between Israel and Iran remains very moderate, with prices up less than 1 per cent since before Israel’s initial attack, according to Carsten Menke, head of next-generation research at Swiss bank Julius Baer.

The gold market’s reaction to the escalating conflict between Israel and Iran remains very moderate

Carsten Menke,
head of next generation research, Swiss bank Julius Baer

“Barring a severe economic impact or a spreading in the region, we do not expect the conflict to lastingly lift prices, in line with the historical pattern,” he said.

“We assume that this reaction has been driven by some speculators and automated trading systems in the futures market rather than by physical safe-haven demand.”