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Oil prices are expected to rise when trading resumes on Sunday after the US bombed Iran’s nuclear facilities, increasing the likelihood that Tehran will respond by attacking energy infrastructure in the region or shipping in the Strait of Hormuz.
How far oil rallies this week will depend on exactly how the Islamic republic chooses to retaliate but in all scenarios crude prices are expected to open higher, analysts said.
“A clear red line has been crossed,” said Jorge León, head of geopolitical analysis at energy consultancy Rystad, noting the weekend’s bombing raids marked the first time the US has directly attacked Iranian territory.
“In an extreme scenario where Iran responds with direct strikes or targets regional oil infrastructure, oil prices will surge sharply,” he said. “Even in the absence of immediate retaliation, markets are likely to price in a higher geopolitical risk premium [and] an oil price jump is expected.”
Oil prices have already risen about 10 per cent since Israel launched its first surprise attack on Iran 10 days ago but have yet to breach $80 a barrel, largely because oil supply from the region has not been affected. Prices for Brent crude, the global benchmark, hit an intraday high of $79 a barrel on Thursday, the highest since January, before closing at $77 on Friday.
The formal entry of the US into the war, however, has introduced “a new layer of volatility into energy markets” leaving traders waiting for “Tehran’s next move,” León said. Global oil markets are closed over the weekend and will reopen at 11pm UK time on Sunday.
US President Donald Trump has warned Iran of further attacks if Tehran does not “make peace” but the Islamic republic had previously pledged to retaliate if the US became involved. Hardliners in Iran were already calling for action on Sunday, with the influential editor of the Kayhan newspaper demanding that the country attack the US naval fleet in the Gulf and stop western ships moving through the Strait of Hormuz.
About a third of the world’s seaborne oil supplies pass daily through the narrow waterway separating Iran from the Gulf states, and any attacks on shipping in the strait would immediately cause energy prices to soar, analysts said.
Iran has previously threatened to shut the strait though it is generally considered that it would struggle to completely block the waterway.
An alternative response could see Iran attack oilfields and infrastructure in US allies in the region, such as Saudi Arabia and Qatar. Anxious about getting drawn into the conflict, Gulf countries have repeatedly called for an end to hostilities and a return to dialogue.
In a statement on Sunday morning, Doha’s foreign ministry warned that the “dangerous tension” in the region could have “catastrophic repercussions”. Saudi Arabia said it was following developments in Iran with “great concern”.
Analysts at S&P Global Commodity Insights said oil would open higher on Sunday but that the rally would ease by Monday morning if there was no immediate Iranian response.
“The key question is what comes next,” James Bambino and Richard Joswick at S&P said. “Will Iran attack US interests directly or through allied militias? Will Iranian crude exports be suspended? Will Iran attack shipping in the Strait of Hormuz?”
Even if Iranian crude exports are disrupted, increased production from the Opec+ cartel and current global inventories mean the oil market will remain sufficiently supplied, so long as the Strait of Hormuz remains open, they added.
Iran exports about 2mn barrels of oil a day, while about 21mn barrels from Iran, Iraq, Kuwait, Saudi Arabia, Qatar and the United Arab Emirates pass daily through the Strait of Hormuz.
