Oil jumps 5% as Iran war fears reignite Middle East supply shock concerns

Global crude oil prices surged more than 5% on Thursday as investors returned to crude due to escalating fears over growing tensions with Iran and resulting deterioration in supply from the Middle East. By 11:00 am New York time, Brent crude futures gained $5.26, or 5.2%, to $107.48 per barrel and WTI gained $3.53, or 4%, to $93.85 per barrel after having declined more than 2% in the previous day.

The new day’s gains came after Iran decided to continue consideration of the US proposal for the end of the war but without committing to any negotiations to bring about peace, thereby increasing concerns that both hostilities, and supply risk will continue to exist. With no clear path towards de-escalation, market participants were fixated on the potential disruption of shipping in and around key chokepoints if no resolution was reached, effectively reversing the market’s temporary sense of relief from the prior day’s postulation of an impending ceasefire.

A primary reason cited by market participants for the surge on Thursday was a significant increase in disruption of flows of seaborne crude oil as evidenced by stalled shipments through the Strait of Hormuz, which handles a large percentage of global crude oil and liquefied natural gas exports. In addition, fears surrounding supply interruptions continue to grow, particularly in light of recent Ukrainian attacks on Russian energy infrastructure and tanker vessels, which have curtailed a significant amount of the Russian export potential.

As crude prices rebound, they affect the larger market through pressure on equity and governements with investors recognizing that the higher energy prices will cause inflation and slow our economic growth. Since the majority of benchmarks have been at or above $100 per barrel recently, this has created tighter financing in the past few weeks, and continued trading above these levels will further increase global fuel costs to all importers and complicate monetary policy the central banks are using to manage inflation expectations.

The larger consuming countries’ governments are looking at ways to ease their domestic market effects from both the energy price explosion and potential supply disruptor to mitigate the inflationary impact. Additional feedback from those requests related to joint stockpile releases, as well as the exploratory timeliness associated with alternative supply chains, demonstrate just how much thought will go into developing the future of oil and natural gas in light of the new Middle Eastern conflicts, and the reduction in Russian pipeline sales to other countries.