Oil Prices Respond to Escalating Middle East Tensions

The oil market faced notable volatility on Monday following a significant surge of 7% on Friday. Renewed military actions between Israel and Iran over the weekend have heightened fears that the conflict could spread throughout the region, potentially disrupting crucial oil exports from the Middle East.

As of 0507 GMT, Brent crude futures climbed by 64 cents, or 0.86%, reaching $74.87 a barrel, while U.S. West Texas Intermediate crude futures increased by 76 cents, or 1.04%, to $73.74. In the earlier part of the trading session, both benchmarks had experienced an increase of over $4 per barrel before briefly dipping into negative territory.

On Friday, both oil benchmarks ended the day 7% higher, having peaked at their highest levels since January with a remarkable increase of more than 13% during the trading session.

On Monday, Iranian missiles targeted key locations in Israel, including Tel Aviv and the port city of Haifa, resulting in significant destruction of homes. This escalation has raised alarms among world leaders attending this week’s G7 meeting, as they worry that the tension between Israel and Iran could spiral into a wider regional conflict.

The exchange of strikes on Sunday has resulted in civilian casualties, prompting both military forces to advise their respective civilian populations to take protective measures against further attacks.

The recent developments have intensified concerns regarding potential disruptions in the Strait of Hormuz, a critical maritime route for oil transportation. Approximately 20% of the global oil consumption, equating to around 18 to 19 million barrels per day (bpd), traverses this vital passage.

According analysts, “The ongoing conflict between Israel and Iran is driving market activity, with no resolution in sight.” He noted that while buying interest has surged, selling pressure emerged on Friday due to concerns about market overreaction.

Market participants are also closely monitoring the potential impact of Israeli strikes on Iranian oil production. Fears of a blockade in the Strait of Hormuz could lead to a significant increase in oil prices.

Iran, a member of the Organization of the Petroleum Exporting Countries (OPEC), currently produces approximately 3.3 million bpd and exports over 2 million bpd of oil and fuel. Analysts and OPEC observers estimate that the spare production capacity of OPEC and its allies, including Russia, is roughly equivalent to Iran’s output.

Analysts also pointed out that any disruption in Iranian crude exports would compel Chinese refiners, the primary buyers of Iranian oil, to seek alternative supplies from other Middle Eastern countries and Russian sources. This shift could lead to increased freight rates and tanker insurance premiums, narrow the Brent-Dubai spread, and adversely affect refinery margins, particularly in Asia.

U.S. President Donald Trump expressed hope on Sunday that Israel and Iran could negotiate a ceasefire, although he acknowledged that some conflicts may require military engagement before resolution. While affirming continued U.S. support for Israel, he refrained from confirming whether he had requested a pause in Israel’s military actions against Iran.