Oil extends rally as escalating Israel-Iran conflict stokes supply disruption fears

TOKYO – Oil prices climbed in early Asian trade on June 16 after

Israel and Iran launched fresh attacks

on June 15, heightening fears that escalating battle could trigger a broader regional conflict and widely disrupt oil exports from the Middle East.

Brent crude futures were up US$1.70, or 2.3 per cent, to US$75.93 a barrel by 6.53am Singapore time, while US West Texas Intermediate crude futures gained US$1.62, or 2.2 per cent, to US$74.60. They had surged more than 5.5 per cent earlier in the morning.

Both benchmarks settled 7 per cent higher on June 13, having surged more than 13 per cent during the day, the most in three years.

The latest developments have stoked concerns about disruptions to the Strait of Hormuz, a vital shipping passage. About a fifth of the world’s total oil consumption passes through the strait, or some 18 to 19 million barrels per day of oil, condensate and fuel.

A closure of Hormuz could propel international prices to as high as US$130, JPMorgan Chase & Co has predicted. A jump in oil would add to inflation pressures around the world.

Widely watched market metrics are pointing to panic over prompt supply risks, as well as growing fears of a protracted conflict in the Middle East. The gap between the grade’s two nearest December contracts – a key indicator on long-term balances – rose by as much as US$1.29 a barrel to US$3.48.

Israel temporarily knocked out a natural gas processing facility linked to the giant South Pars field, Iran’s biggest, in an attack on June 14, and targeted fuel storage tanks during strikes as part of its campaign against Tehran’s nuclear programme.

While the attack was concentrated on the Islamic republic’s domestic energy system rather than exports to international markets, oil traders and analysts are preparing for more turmoil. 

“Now that threshold has been crossed, there will be questions about whether Israel is going to target more Iranian energy infrastructure,” said Mr Richard Bronze, head of geopolitics at consultant Energy Aspects. “We appear to be in an escalatory cycle.”

Despite US sanctions, Iran remains the third-biggest producer in the Organisation of the Petroleum Exporting Countries (Opec). Its allies in Yemen, the Houthi militants, have harassed ships in the region and Tehran has in the past threatened to halt the Strait of Hormuz, a critical transit point in the Persian Gulf. It has, however, never blockaded the key maritime choke point.

If oil supplies are disrupted, US President Donald Trump will likely call on the Opec+ alliance led by Saudi Arabia to tap its considerable spare production capacity, Ms Helima Croft, head of global commodity strategy at RBC Capital Markets, and a former Central Intelligence Agency analyst, said in a note on June 13. 

But it is unclear whether Opec could offset a severe and prolonged outage in Iran, which pumps around 3.4 million barrels a day. 

The attempt alone could put the energy infrastructure of the Saudis and the United Arab Emirates (UAE) into the cross-hairs. After Riyadh backed Mr Trump’s earlier crackdown on Tehran during his first term, its critical oil-processing installation at Abqaiq was blown up by the Houthis in 2019.

“Opec spare capacity could be brought online to offset a reduction in Iranian barrels,” said Mr Clay Seigle, senior fellow at the Centre for Strategic and International Studies in Washington, DC. “But it would be politically dicey for Saudi Arabia and UAE to benefit in this way at Tehran’s expense.”

The fact that major oil facilities have so far been spared in the current tumult may offer markets some reassurance.

“We would probably need to see evidence of an intensifying war – with far more widespread damage and mass civilian casualties – for that expectation to change and the risk premium in crude to spike further,” said Ms Vandana Hari, founder of Singapore-based energy consultancy Vanda Insights. 

The International Energy Agency, the Paris-based watchdog set up by consuming nations, said that global oil markets are well supplied amid slowing fuel demand and recent production increases by Opec+. The agency said it is prepared to tap emergency stockpiles if necessary.

On June 15, Mr Trump said in a Truth Social post that the two belligerent countries should and will make a peace deal. Mr Trump had said before Israel’s attacks that he was dissatisfied with rising oil prices. 

Fears over the Strait of Hormuz are probably excessive too, Ms Hari added. Such an extreme step would cut off Iran’s own export route and alienate its biggest customer, China.

“Iran has never actually blocked the channel despite many threats to do so down the years and I don’t expect it will do so now,” she said. BLOOMBERG, REUTERS