Oil prices rise following US and Israel attacks on Iran; attention on risk in Strait of Hormuz

Oil prices experienced a significant surge following a major military operation carried out by the US and Israel against Iran. This operation escalated geopolitical tensions in the Middle East. In response to the military strikes, Iran launched missile attacks on Israel and on countries hosting US military bases, including Saudi Arabia, the UAE, Qatar, Bahrain, Jordan, and Kuwait. The aftermath of these events saw Brent crude prices spiking by over $5 per barrel in early trading, briefly surpassing the $82 mark before retracting. The widening front-month spread points to an immediate physical tightness in the market, coupled with a growing geopolitical risk premium.

The focal point of market risk is currently centered on the Strait of Hormuz, where reports of tanker attacks have led to a slowdown in shipping activity. This strategic waterway facilitates approximately 20% of global oil flows, and any disruptions in traffic through this corridor significantly impact price volatility and freight markets. Some industry operators are now reevaluating their movements through the Bab al-Mandab Strait, which poses the risk of longer trade routes and increased insurance costs. While Saudi Arabia and the UAE possess limited pipeline capacities to circumvent the Strait of Hormuz, any prolonged closure would pose a significant challenge.

The critical variable that could heavily disrupt oil markets is the escalation targeting regional energy infrastructure rather than just shipping delays. Saudi Arabia’s export and refining assets are particularly vulnerable due to their geographical exposure across the Gulf region. Similarly, Iran’s crude exports heavily rely on Kharg Island. Any sustained damage to production or export capabilities could swiftly tighten global oil balances. Furthermore, reports of strikes near major Saudi facilities have reignited concerns about potential disruptions similar to the 2019 Abqaiq attack.

The aviation sector is also anticipated to be impacted by these geopolitical developments, with airspace closures and airport disruptions likely to weigh on regional jet fuel demand in the short term. Conversely, there may be a partial offset by increased military fuel consumption.

Asian importers are identified as the most at risk of Gulf supply disruptions, with varying stock levels and higher vulnerability in cases where import cover is limited and dependence on the Strait of Hormuz route is substantial. The US is expected to refrain from releasing crude oil from its Strategic Petroleum Reserve unless infrastructure damage significantly tightens global supply. Presently, global oil balances depict a modest surplus supported by increased production in the Americas, although this depends on the conflicts being contained and continuous uninterrupted physical supply.

Observers of the market are closely monitoring:
1. The duration of disruption in the Strait of Hormuz
2. Escalation targeting major oil infrastructure
3. Policy responses, including decisions from OPEC+ regarding supply and potential Strategic Petroleum Reserve releases
Maintaining intact infrastructure could potentially alleviate volatility; however, if escalation intensifies, oil prices may undergo a structural repricing as supply risks become embedded in the market.

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