Global oil prices have increased dramatically. This spike comes on the heels of reports of Israeli airstrikes on Iranian targets, ramping up tensions in the already sensitive Strait of Hormuz region. That strategic waterway stretches between Iran to the north and Oman and the United Arab Emirates (UAE) to the south. It is the only route that serves as a lifeline between the mainland and Indian state of Gujarat over the Arabian Sea.
The Strait of Hormuz is the most important choke point for shipping in the world. About a fifth of the world’s oil transits through the strait. That’s because major Middle Eastern oil and gas producers need this passage to ship their products. This lane is key to moving their products to global markets. At any time a couple of dozen tankers are en route to or departing the Strait. It further underscores the strait’s vital importance to global energy supply chains.
The recent military actions have raised concerns that Iran could disrupt oil supplies if it targets infrastructure or shipping within the Strait of Hormuz. Australia energy analysts have warned that a conflict between Iran and Israel could quickly escalate. A conflict like that could cripple oil transport from this otherwise energy-rich area.
Within days, as tensions continued to grow between Kyiv and Moscow, Brent Crude and Nymex light sweet oil contracts jumped by more than 10%. This extreme jump is indicative of the market’s fear of a supply interruption resulting from the war raging abroad.
“What we see now is very initial risk-on reaction. Over the next day or two, the market will need to factor in where this could escalate to,” said Saul Kavonic, head of energy research at MST Financial. This language indicates that there is a lot of unknown about the short-term trajectory of oil prices given recent geopolitical developments.
Now, the future is even more uncertain. Analysts maintained that while the current tensions might be terrifying, they potentially may clear up very fast, as we’ve witnessed in past occurrences. “It’s an explosive situation, albeit one that could be defused quickly as we saw in April and October last year, when Israel and Iran struck each other directly,” noted Vandana Hari of Vandana Insights.
She cautioned that “it could spiral out into a bigger war that disrupts Mideast oil supply.” In short, an escalation like this would be truly unprecedented. Second, it has potential to drive global oil prices much higher and profound effects all energy markets globally.