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After the US attacked Iran, oil prices rose to five months high, then pose a risk that Tehran responded by attacking local energy infrastructure and shipping in the Strait of Hormuz.
International oil benchmark Brent Crude rose to $81.40 per barrel when the market opened in Asia on Monday before returning to a 0.8% increase at $77.63 in London.
The West Texas Intermediate US marker eased trading at $74.42 after rising 4.6% to $78.40.
A further move in oil prices this week will depend on exactly how proxies such as the Islamic Republic or Housis chose to retaliate, analysts said.
“A transparent red line crossed,” said Jorge Leon, head of geopolitical analysis at energy consultant Tristad, who said the weekend bombing was the first time the US had directly attacked Iranian territory.
“In extreme scenarios where Iran responds with a direct strike or targets local oil infrastructure, oil prices will skyrocket sharply,” he said. “Even if there is no immediate retaliation, the market could still have a higher geopolitical risk premium.”
Oil prices have already risen by around 14% since Israel launched its first surprising attack on Iran 10 days ago. Rising oil prices could ripple into other energy markets, such as gasoline, which could drive new inflation around the world.
With the US entry into the war introducing a “new layer of volatility in the energy market,” traders are waiting for “Tehran’s next move.”
US President Donald Trump warned Iran of further attacks if Tehran could not “make peace,” but the Islamic Republic has previously promised to retaliate if the US was involved. Iranian hardliners had already called for action on Sunday. An influential editor of the Kaihan Newspaper attacked the US naval fleet in the Gulf and demanded that Western ships be stopped moving along the Strait of Hormuz.
About a third of the world’s seawater supply passes daily through narrow waterways separating Iran from the Gulf countries, and attacks on transport in the channel will soon surge in energy prices, analysts said.
Iran previously threatened to close the straits, but analysts believe that with the presence of the US Navy’s 5th Fleet in Bahrain, it will have a hard time blocking the waterways completely.
“Security officials argue that it will be difficult for Iran to completely close the Strait of Hormuz for a long period of time,” said Helima Croft, a former CIA analyst currently in the RBC’s capital market. “That being said, several security experts argue that Iran has the ability to attack individual tankers and major ports with missiles and mines,” she said.
Iran also uses waterways to ship oil to China and other importers.
Alternate responses can attack the oil fields and infrastructure of US allies in the region, such as Saudi Arabia and Qatar. Worried about being drawn into conflict, Gulf countries have repeatedly called for an end to hostilities and a return to dialogue.
In a statement Sunday morning, Doha’s Foreign Ministry warned that “dangerous tensions” in the region could have “devastating effects.” Saudi Arabia said it is chasing Iran’s development with “big concerns.”
Analysts at S&P Global Commodity Insights said that without Iran’s immediate response, crude oil price rally could be easier by Monday morning.
“The key question is what happens next,” said James Bambino and Richard Joswick of S&P. “Does Iran directly attack US interests, or through allied militias? Will Iran’s oil exports be stopped? Will Iran attack shipments in the Strait of Hormuz?”
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Even if Iran’s crude oil exports were suspended, the oil market would be well supplied as long as the Strait of Hormuz remained open due to increased production from the OPEC+ cartel and the current global inventory.
Iran exports about 2 million barrels of oil a day, and around 21 million barrels of barrels pass through the Strait of Hormuz every day from Iran, Iraq, Kuwait, Saudi Arabia, Qatar and the United Arab Emirates.
Analysts said the longer geopolitical tensions in the Middle East are, the higher the risk of high oil prices over the long term, and the greater the risk of boosting inflation and global economic growth.
“You’ll find it difficult for the Trump administration to balance Iran’s nuclear ambitions while avoiding long-term spikes in oil prices.
Additional Reports by William Sandland of Hong Kong
