Oil prices continue to rise on Israel-Iran war worries

A broader conflict in the region threatens to disrupt global energy supplies

Israel intercepts missiles launched by Iran, as seen from Ashkelon, Israel. The attacks led oil prices to surge by up to 5 per cent on Tuesday. Reuters

Oil prices rose for a second day on Wednesday amid fears that Iran’s missile strike on Israel could lead to an all-out war in the region, which could impede global crude supplies from the Middle East.

Brent, the benchmark for two-thirds of the world's oil, was trading 3.18 per cent higher at $75.90 a barrel at 3.31am UAE time. West Texas Intermediate, the gauge that tracks US crude, was up 3.45 per cent to $72.24 per barrel.

Crude prices shot up sharply on Tuesday after Iran's late-night strike on Israel, with Brent closing 2.5 per cent higher, while WTI was up 2.4 per cent. Prices of both benchmarks surged as much as 5 per cent during intraday trading.

“Both [benchmarks] are trending higher today as markets price in a sustained period of regional geopolitical anxiety,” Edward Bell, head of market economics at Emirates NBD, said.

Tehran launched a barrage of missiles at Israel on Tuesday, drawing a vow of swift retaliation from Prime Minister Benjamin Netanyahu.

The attack, involving more than 100 missiles, was Iran’s second such salvo this year. Iran’s Islamic Revolutionary Guard Corps said that Tehran’s action is a response to the killings of Hezbollah leader Hassan Nasrallah and other leaders of the militant group in recent Israeli strikes in Lebanon.

The Pentagon on Tuesday said Iran’s latest barrage was about twice as large as its April strike against Israel. There has been a strong response from US politicians, including Lindsey Graham, a senior Republican US senator, who has urged the White House to strike Iran's oil infrastructure in retaliation.

The US said there will be consequences for Iran, while the Israeli Prime Minister said, “whoever attacks us, we attack them”.

Iran said its retaliatory action is over, but it would strike back if Israel launched an attack on Iranian soil.

The Tuesday night attacks have brought a “fresh bout of Mideast geopolitical risk premium” back into play, Singapore-based Vanda Insights said in a note on Wednesday.

Iran, which produces more than 3 million barrels a day of oil, is an Opec member and is vital to maintain balance in the global energy market.

Oil could climb as much as $7 a barrel if the US and its allies placed economic sanctions on Iran, or by $13 should Israel strike Iranian energy infrastructure, Bloomberg reported, citing preliminary estimates from Clearview Energy Partners.

A disruption to flows through the Strait of Hormuz could have the biggest impact, driving crude $13 to $28 higher, the company said.

“If Iran, which produces around 3 million barrels per day, gets seriously involved in the conflict, we could see the price of a barrel remain under positive pressure for a prolonged period,” Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said.

“This being said, the geopolitical tensions have a limited impact in the medium to long run price trends, and the gains on the back of tensions should be given back with de-escalation and/or as the market gets used to the headlines and divert focus to something else.”

Brent prices are down nearly 18 per cent since reaching a high of $91 a barrel in April, in part due to concerns around fuel demand in China, the world's second-largest economy and top crude importer.

Last week, China unveiled its largest economic stimulus package since the pandemic, which includes a reduction in its key short-term interest rate and a lowering of mortgage rates for existing housing loans. The measures aim to combat a slowdown in the country's economy, which is facing deflation, weak consumer spending, a slumping property market and a manufacturing downturn.

Oil producers' group Opec+, meanwhile, is scheduled to meet later on Wednesday. The meeting of the 23-member group will “give an indication if the producers bloc is sticking with its plan to increase output later this year after having delayed the initial start date by two months”, Emirates NBD's Mr Bell said.

However, Vanda Insights said the meeting today is “not expected to recommend any changes to production policy”.