Global oil prices surged following recent military actions between Israel and Iran, raising concerns over the stability of one of the world’s most critical shipping routes, the Strait of Hormuz. The Strait is the gateway to military conflict, sharing a border between Iran to the north and Oman and the United Arab Emirates to the south. Strategically, it is an indispensable passageway connecting the Gulf with the Arabian Sea. Almost one-fifth of the world’s oil passes through this geopolitical bottleneck. This fact renders it a strategic vulnerability for the big three Middle Eastern oil and gas producers.
In reality, dozens of these same tankers routinely move in and out of the Strait of Hormuz. They haul millions of barrels of oil each and every day. As tensions continue to increase in the region, many analysts have expressed fears that Iran will attack shipping infrastructure, which could further cut off these life-saving supplies. The geopolitical situation is a serious downside threat to global oil markets, especially if conflict between Iran and Israel spreads.
In response to the heightened tensions, Brent Crude and Nymex light sweet oil contracts saw an increase of over 10%. As with any legislative or regulatory change, market experts are evaluating the short and long-term impacts of these developments. Saul Kavonic, head of energy research at MST Financial, tweeted his initial reaction of the market’s response.
“What we see now is very initial risk-on reaction. But over the next day or two, the market will need to factor in where this could escalate to,” – Saul Kavonic.
The Strait of Hormuz is critically important for global energy transportation from the Middle East. Even a temporary disruption would send ripples to global oil prices. Vandana Hari, founder of analytics firm Vandana Insights, emphasized how fragile the situation is.
“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,” – Vandana Hari.
She had previously warned that the conflict could spread and become a wider war. Such regional escalation would be expected to severely disrupt oil supply from the Middle East.
“It could also spiral out into a bigger war that disrupts Mideast oil supply,” – Vandana Hari.
While all of these events are under different scrutiny from international observers, market participants are clearly getting more worried about supply stability. A much bigger conflict waits in the wings near the Strait of Hormuz. That leads to a broader question of how these escalating tensions will be impacting global oil prices in the days and weeks ahead.