Escalating Tensions Between Israel and Iran Cause Volatility in Oil Markets

U.S. crude oil prices saw a significant surge on Monday as the market remained in a precarious “watch-and-wait” mode amid developments in the Middle East. Factors such as potential military actions between Israel and Iran have contributed to the volatility observed in recent days.

The U.S. benchmark West Texas Intermediate increased by 9.09% last week, marking the most notable weekly rise since March 2023. Similarly, Brent, the global benchmark, saw an 8.43% jump, representing its most considerable weekly advance since January 2023.

Oil markets reacted strongly to the speculation that Israel might strike Iranian oil facilities in retaliatory action against Tehran’s recent ballistic missile activities. As of now, the decision of whether or not to execute such strikes remains pending, with President Joe Biden reportedly advising against targeting Iran’s oil infrastructure to avoid further tensions.

Helima Croft, the head of global commodity strategy at RBC Capital Markets, highlighted the potential severe consequences for the oil market should Israel decide to target strategic locations like Iran’s Kharg Island, which handles 90% of the country’s crude exports. Croft expressed her concerns on CNBC, stating the possibility of regional war has shifted closer than in recent times.

Meanwhile, Alan Gelder, vice president of oil markets at Wood Mackenzie, shared with CNBC that while markets are somewhat prepared for a potential strike against Iranian facilities, the most severe scenario would involve disruption in the Strait of Hormuz, a crucial passage for 20% of global crude exports.

The ongoing conflict between Israel and Hamas has now extended into a multifaceted war involving other regions and groups, including Hezbollah in Lebanon and Houthi militants in Yemen. These groups, allied with Iran, contribute to the increased regional instability. So far, there has been no substantial disruption to the global oil supply, but experts caution against rising risks as the situation remains unresolved.

In a related development, India, a significant importer of crude oil, stated it does not foresee any immediate shortages despite the market upheaval. Union Minister for Petroleum and Natural Gas, Hardeep Singh Puri, assured that there is currently more oil available globally than needed for consumption.

Energy market expert Narendra Taneja voiced potential concerns for India should Gulf tensions escalate further. Should Iran choose to block the Strait of Hormuz in response to potential Israeli actions, the ramifications could drastically affect oil prices.

Despite recent climbs, crude prices globally are expected to stabilize as neither Israel nor Iran seem poised for all-out war. Expert analyses suggest the likelihood of a full-scale confrontation remains low, as highlighted by Ian Bremmer of Eurasia Group, suggesting careful diplomatic maneuvering by both nations.

The oil markets, therefore, show signs of stabilizing; futures data indicate a gradual decline in Brent crude prices over the coming months, reflecting an overall decrease in market tension projections.