Rising tensions send crude oil prices surging toward $100 (CAD 135)
The price of crude oil is rapidly increasing due to escalating conflict between Israel and Iran. Prices have reached their highest level in a year, exceeding $77 (CAD 105) per barrel. Investors are concerned about potential attacks on Iranian oil infrastructure and disruptions in regional supplies, which could further drive up prices.
Crude oil prices are rising quickly. Brent crude nearly hit $78 (CAD 105) per barrel on Thursday after a sudden 5% jump. This was the fastest one-day increase in almost a year. American WTI crude prices also surged, nearing $74 (CAD 100). Over the week, the commodity rose by about 8%, marking the highest weekly increase since the beginning of 2023, according to Bloomberg.
The reason for the sudden hikes is the increased tensions between Israel and Iran in recent days. Iran launched a massive missile attack on Israel, retaliating for earlier Israeli actions against organizations allied with Tehran, such as Hezbollah.
Concerns about the stability of oil supplies from the Middle East
Oil market analysts note the current situation poses a real risk of disruptions in oil supplies from the Middle East. This region accounts for about one-third of the world's crude supply. Iran produces approximately 3.3 million barrels of oil daily, making it the third-largest producer in the Organization of Petroleum Exporting Countries (OPEC).
Experts from Citigroup estimate that a major Israeli attack on Iranian export infrastructure could remove up to 1.5 million barrels per day from the market. Even if smaller facilities are targeted, the loss could range from 300,000 to 450,000 barrels per day.
There are also concerns that Iran may escalate the situation by attacking energy infrastructure in neighbouring countries or disrupting transport through the strategic Strait of Hormuz. We reported on its significance a few days ago. According to analysts from Clearview Energy Partners, interrupting the flow through this narrow waterway off the coast of the Persian Gulf could cause oil prices to rise by $13 (CAD 18) to $28 (CAD 38) per barrel.
Potential economic impacts of rising oil prices
Sustained increases in oil prices could have severe repercussions for the global economy. Higher energy prices could trigger a resurgence of inflation, creating challenges for central banks, including the U.S. Federal Reserve, which recently began easing interest rates.
Options markets are already signalling potential further increases in oil prices. Call options on Brent crude, which gain value as prices rise, have reached their highest premium over put options in a year. Implied volatility has also increased significantly, indicating heightened market uncertainty.
Despite geopolitical tensions, the OPEC+ alliance has confirmed its plan to restore some suspended production from December. Meanwhile, Libya is resuming production after resolving its internal political crisis. Indicators in the physical market suggest fundamentals remain weak, and it is unclear whether a potential stimulus package in China, the world's largest oil importer, will significantly impact consumption.
Experts don't rule out $100 (CAD 135) per barrel
Amid escalating tensions in the Middle East, analysts warn of potential sharp increases in oil prices. Experts do not dismiss the possibility that the price of crude could exceed $100 (CAD 135) per barrel.
Bob McNally, president of Rapidan Energy Group's consulting firm, advises against excessive optimism. "It’s hard to overstate how complacent the oil markets have become," said the expert, who previously advised former President George W. Bush on energy matters, in an interview with CNN.
Potential escalation scenarios of the conflict
A key factor affecting oil prices is how Israel decides to respond to the recent missile attack from Iran. Helima Croft, global head of commodity strategy at RBC Capital Markets, highlights the risk of Iran "internationalizing" the crisis by attacking oil infrastructure in the region.
According to analysts from ClearView Energy Partners, an Israeli attack on Iranian energy facilities could push oil prices up to $86 (CAD 117) per barrel. A susceptible target is the export terminal on Kharg Island, responsible for 90% of Iran's oil exports.
Kevin Book from ClearView Energy Partners emphasizes the political dimension of the situation. "There are few metrics more likely to impact voter perception of economic well-being than the price of gasoline," he notes. A spike in fuel prices just weeks before the U.S. presidential elections could significantly impact their outcome.
Experts also mention that the market may be underestimating the current risks associated with the Middle East situation. "There are only so many times you can play brinksmanship without actually tipping over into a conflict," says one analyst in an interview with CNN. They recall that in 2019, an attack on Saudi oil installations, which the U.S. blamed on Iran, led to a sharp rise in oil prices.
