Oil prices rise as Israel launches air strikes on Iran, putting in doubt Mid-East supplies

SINGAPORE – Oil prices spiked to their highest level in three years early on June 13 as news broke that Israel had launched dozens of air strikes against Iran, targeting its nuclear programme and military facilities, and killing its senior commanders.

Futures on global benchmark Brent crude oil soared by as much as 13 per cent – the biggest intraday move since March 2022 – to US$78.50 a barrel. Prices pulled back to US$73.07 at 3.50pm Singapore time, still up 5.3 per cent from their previous close.

Shock waves from the oil market also hit stock markets across Asia, from Hong Kong and Shanghai to Malaysia and Japan.

The Straits Times Index, the Singapore stock benchmark, closed 0.3 per cent lower to 3,911.42 points.

The fall was led by stocks likely to be impacted by higher oil prices. Seatrium, which builds offshore oil and gas platforms, slipped 2.8 per cent. Worries that jet fuel prices may also gain contributed to Singapore Airlines going down 1.3 per cent.

The large-scale Israeli attack

could push the Middle East – home to some of the world’s top oil-exporting nations – to the brink of a new war and upend global oil supply and demand dynamics, analysts said.

Oil prices were on a downtrend, hitting a low of about US$60 in May after the Organisation of Petroleum Exporting Countries (Opec) on May 3 decided to increase production for a second month in a row.

Increased output, if sustained, was expected to restore nearly 2.2 million barrels per day of output by October and keep prices around US$60 or lower.

Iranian state television said the Natanz site in central Iran, one of the country’s two main nuclear plants, was struck.

It also said several senior figures were killed, including Major-General Hossein Salami, head of the elite Revolutionary Guards; Professor Mohammad Mehdi Tehranchi, a prominent physicist; and Mr Fereydoon Abbasi, a former head of Iran’s atomic organisation.

The worsening Middle East conflict raises the risk of disruptions to oil supplies from key oil- producing nations in the region, said Ms Priyanka Sachdeva, senior market analyst at Phillip Nova, an affiliate of Singapore’s investment manager PhillipCapital Group.

“The risk appetite of oil investors will likely be tested today with immense volatility and uncertainty,” she said.

Fear of retaliation by Iran may prompt oil traders to secure more supplies before the weekend, pushing prices through June 13 higher, analysts said.

Most of the Middle East oil flows from the Persian Gulf through the Strait of Hormuz. The strait is one of the world’s most important oil transit choke points.

Any material shipping disruptions resulting from a blockage of the Hormuz could have profound consequences for the global economy. But Asia’s largest economies would be the most vulnerable.

Around 80 per cent of oil flows from the Gulf is destined for Asian markets, with India, China, Japan and South Korea accounting for around two-thirds of those flows.

Ms Selena Ling, OCBC Bank’s chief economist and head of treasury research and strategy, said: “The question is if this situation escalates into a broader regional conflict. If yes, then there is definitely upside risk to oil prices.”

She added that if the conflict escalates and there are further sanctions on Iran, or the Strait of Hormuz is blocked, it could also pose risks to the pullback in inflation that most central banks have been counting on to ease monetary policy. “The issue is whether tensions escalate and if they are prolonged.”

There are, however, some mitigating factors to consider.

Saudi Arabia and the United Arab Emirates – the world’s top oil exporters – have the capacity to divert a meaningful portion of their current Gulf exports through pipelines, which would partially alleviate the adverse effects of any closure or major shipping disruptions.

The alternative ports are, however, in the Red Sea and thus vulnerable if Yemen decides to join the fray. The US halted its bombing campaign against Yemen’s Houthis in May after the Iran-aligned group agreed to stop targeting shipping in the Red Sea.

The closure of Hormuz is always flagged as a risk whenever tension arises in the Middle East.

But so far, despite Iran’s repeated threats to do so, it has yet to follow through, due to the adverse consequences for its own oil outlet, let alone the potential response from the international community.