Oil Prices and the Conflict with Iran
Oil slipped as President Donald Trump pushed for lower prices and fears faded that the conflict with Iran would immediately disrupt supplies from the Middle East.
West Texas Intermediate slid about 1% to trade near $73 a barrel after initially surging as much as 6.2%. Trump warned against rising oil prices in a social media post, urging the Department of Energy to facilitate more drilling “now.” Energy Secretary Chris Wright replied, “We’re on it.”
Crude’s gains had begun fading even before Trump’s post as concerns waned that Iran would interfere with energy flows in retaliation for U.S. air attacks over the weekend that targeted its nuclear sites.
Tehran warned earlier that the strikes would trigger “everlasting consequences,” and Reuters reported that the U.S. sees a high risk of a strike back against U.S. forces soon.
Business Briefing
Understanding the Conflict
“Traders are holding their breath, waiting to see if Israel or Iran expand this conflict beyond military and political targets into traded energy,” Bob McNally, founder of Rapidan Energy Advisers LLC and a former White House energy official, said in an interview on Bloomberg Television.
“So far, no one has pulled that trigger.”
The oil market has been gripped by an escalating crisis since Israel attacked Iran more than a week ago, with crude benchmarks pushing higher, options volumes spiking and the futures curve shifting to reflect fears of a near-term interruption to supplies.
The Middle East accounts for about a third of global crude production, but there haven’t yet been any signs of disruption to physical oil flows, including for cargoes going through the Strait of Hormuz chokepoint. Since Israel’s attacks began, there have been signs that Iranian oil shipments out of the Gulf have risen rather than declined.
Risks to Crude Flows
The unprecedented U.S. strikes were meant to hobble Iran’s nuclear program, and targeted sites at Fordo, Natanz and Isfahan. At the United Nations on Sunday, Tehran’s Ambassador Amir Saeid Iravani said the “timing, nature and scale” of its response “will be decided by its armed forces.”
There remain multiple, overlapping risks for crude flows. The biggest of those centers on the Strait of Hormuz, should Tehran seek to retaliate by attempting to close the narrow conduit. About a fifth of the world’s crude output passes through the waterway at the entrance to the Persian Gulf.
Two supertankers U-turned away from the strait on Sunday, before subsequently resuming on their original course and heading to transit the chokepoint.
Iran’s parliament has called for the closure of the strait, according to state-run TV. Such a move, however, couldn’t proceed without the approval of Supreme Leader Ayatollah Ali Khamenei. Authorities may yet restrict flows in other ways.
Naval Presence and Energy Prices
Navies in the region have consistently warned about an elevated threat to tankers, though a liaison between the military and shipping said on Sunday that the continued passage of vessels through the strait is “a positive sign for the immediate future.”
“Base case remains that we don’t see significant disruptions, neither of oil nor natural gas in the Middle East,” Daan Struyven, head of oil research at Goldman Sachs Group Inc., said in a Bloomberg TV interview. “We actually have energy prices gradually declining.”
Rival Suppliers
It’s not just crude markets being roiled by the the threats to supply. Diesel futures in Europe also surged at the open, touching the equivalent of almost $110 a barrel, before erasing those gains. The Middle East is a significant supplier of barrels to the region.
The crisis will also throw a spotlight onto the Organization of the Petroleum Exporting Countries and its allies, including Russia. In recent months, OPEC+ eased supply curbs at a rapid clip to regain market share, and yet members still have substantial idled capacity that could be reactivated.
U.S. crude’s prompt spread — the difference between its two nearest contracts — first widened to as much as $2.24 a barrel in a bullish backwardation structure, from $1.18 on Friday. The closely followed metric then retraced much of that move.
“It may take a few days or even weeks to discern the Iranian response to this unprecedented attack,” RBC Capital Markets LLC analysts including Helima Croft said in a note. “Above all, we would caution against the knee-jerk ‘the worst is behind us’ hot-take at this stage.”
Conclusion
In conclusion, the conflict between the U.S. and Iran has led to a significant increase in oil prices, with West Texas Intermediate surging as much as 6.2% before sliding back. The situation remains volatile, with multiple risks to crude flows, including the potential closure of the Strait of Hormuz. As the situation continues to unfold, it is likely that energy prices will remain elevated, and the global economy will be impacted.
Frequently Asked Questions
Q: What is the current situation with oil prices?
A: Oil prices have surged due to the conflict between the U.S. and Iran, with West Texas Intermediate rising as much as 6.2% before sliding back.
Q: What are the risks to crude flows?
A: The biggest risk to crude flows is the potential closure of the Strait of Hormuz, which could disrupt a significant portion of global crude output.
Q: How will the conflict impact the global economy?
A: The conflict is likely to impact the global economy, particularly if energy prices remain elevated. This could lead to higher production costs and lower economic growth.
Q: What is the role of OPEC+ in the current situation?
A: OPEC+ has eased supply curbs in recent months to regain market share, and members still have substantial idled capacity that could be reactivated. The organization will play a crucial role in determining the global supply of crude oil in the coming weeks and months.
