Temporary Surge in Oil Prices Following Attack on Iran
Following reported explosions near Isfahan in Iran, oil prices experienced a sudden surge. However, the gains were short-lived as authorities worked to downplay the escalation in Middle East tensions.
Oil prices rose significantly due to reported explosions near Isfahan in Iran. However, the gains were short-lived as officials downplayed the situation, easing tensions in the Middle East.
Brent crude, the global oil benchmark, initially surged over 3% but later dropped by 0.4% to $86.8 per barrel. Similarly, US crude futures also saw a decrease of 0.3% to $82.50 after an initial increase.
Israel has reportedly conducted a military strike inside Iran, according to a US official speaking to CNN. This action has the potential to escalate tensions in the oil-rich region. The Israeli military has not confirmed their involvement, and Iran has not publicly identified the source of the attack.
In response to Iran's recent airstrikes, Israeli Prime Minister Benjamin Netanyahu stated that the country would take its own actions. The airstrikes from Iran were launched in retaliation for a suspected Israeli strike on its embassy compound in Syria earlier this month.
The risk to the physical supply of oil has increased due to the overnight attack on Iran and the potential for retaliation. However, Neil Shearing, chief economist at consultancy Capital Economics, noted in a Friday report that the market response during European hours indicates that some of this risk has already been factored into oil prices.
Oil prices have seen a 15% increase since the beginning of the year. This rise can be attributed to concerns over a possible escalation of conflict in the Middle East, production cuts by the Organization of the Petroleum Exporting Countries, and expectations of a rise in Chinese demand.
The biggest concern in the oil market is the possibility of a broader conflict affecting shipping in the Strait of Hormuz. This narrow passage is located off Iran's southern coast and serves as a crucial route for over a quarter of the world's daily maritime oil trade.
Israel's Iron Dome air defense system intercepts missiles fired from Iran, in central Israel, on April 14, 2024.
Israel's Iron Dome air defense system intercepts missiles fired from Iran, in central Israel, on April 14, 2024.
Tomer Neuberg/AP
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How the Israel-Iran conflict could send oil prices higher
Iran is a major oil producer, mainly exporting its crude to China due to international sanctions. Richard Bronze from Energy Aspects warns that a decrease in Iranian oil exports would greatly affect the global market, as China would need to seek alternative suppliers. Additionally, ANZ analysts highlighted potential risks to oil supply in other regions.
The United States has decided to reimpose sanctions on Venezuela's oil industry, potentially causing disruptions in its exports. Mexico has also announced plans to reduce oil exports due to high domestic demand.
In response to the recent developments in the Middle East conflict, various markets experienced significant reactions. Gold prices surged as investors sought refuge in safe-haven assets, although the gains were slightly reduced during European trading hours.
Most stock markets in Asia experienced significant declines. Taiwan’s Taiex index dropped by 3.8%, Japan’s Nikkei 225 closed 2.7% lower, South Korea’s Kospi ended 1.6% down, and Hong Kong’s Hang Seng index fell by 1%.
The market impact lessened after reports from Iranian state-aligned media suggested that the attack was limited in scope. A regional intelligence source familiar with Iran’s potential response to the strike mentioned that direct state-to-state strikes between Iran and Israel were unlikely to occur.
European stock markets were trading slightly lower by 6:30 a.m. ET, with the region's benchmark Stoxx 600 index down by 0.4%.
At the same time, Israel's benchmark Tel Aviv 125 Index, made up of the 125 most valuable companies on the Tel Aviv Stock Exchange, remained flat.
On Thursday, S&P Global Ratings downgraded the country's sovereign credit rating from AA- to A+ due to heightened geopolitical risks stemming from its conflict with Hamas and tensions with Iran.
According to analysts at S&P, they anticipate that a larger regional conflict will be avoided, but the ongoing Israel-Hamas war and clashes with Hezbollah, backed by Iran, are expected to persist until 2024.
Hamas attacked Israel on October 7, killing about 1,200 people and taking more than 250 hostages.
Editor's P/S:
The recent geopolitical tensions in the Middle East have had a significant impact on global oil prices. Initial spikes in crude futures after reported explosions near Iran's Isfahan were quickly reversed as officials downplayed the situation. However, the underlying risk of supply disruptions remains elevated due to ongoing conflict and potential retaliation. The heightened uncertainty has also fueled volatility in other markets, with gold prices surging and Asian stock markets experiencing sharp declines.
While the immediate threat of a broader regional conflict appears to have diminished, the ongoing conflict between Israel and Hamas, coupled with tensions with Iran, is expected to continue. This raises concerns about the potential impact on oil supplies, particularly given Iran's status as a major oil producer. The re-imposition of sanctions on Venezuela's oil industry and Mexico's plans to reduce exports further add to the supply uncertainties. As such, the global oil market remains vulnerable to further volatility, and investors should closely monitor developments in the Middle East.
