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Oil prices are expected to rise when trading resumes on Sunday after the US bombs Iran’s nuclear facilities, increasing the likelihood that Tehran will respond by attacking local energy infrastructure and shipping in the Strait of Hormuz.
The extent to which oil will turn 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 transparent red line crossed,” said Jorge Leon, head of geopolitical analysis at energy consultant Tristad, who said the weekend bombing raid was the first time the US had directly attacked Iranian territory.
“In extreme scenarios where Iran responds with a direct strike or targets local oil infrastructure, oil prices will skyrocket sharply,” he said. “Even without immediate retaliation, the market is likely to have a higher geopolitical risk premium (and) a rise in oil prices.”
Oil prices have already risen by about 10% since Israel launched its first shocking attack on Iran 10 days ago, but have not violated $80 per barrel, mainly because oil supply from the region has not been affected. Prices for global benchmark Brent crude reached a high of $79 per barrel on Thursday, closing at $77 on Friday.
However, with the formal entry into the war, traders are waiting for “Tehran’s next move,” as the US has introduced a “new layer of volatility into the energy market,” Leon said. Global oil markets will close over the weekend and reopen at 11pm on Sunday.
US President Donald Trump warned Iran of further attacks if Tehran “doesn’t make peace” but had pledged to retaliate if the Islamic Republic had previously committed to retaliation if the US was involved. Iranian hardliners had already called for action on Sunday. An influential editor of the Kaihan Newspaper attacked the US naval fleet in the Gulf and demanded that Western ships be stopped moving along the Strait of Hormuz.
About a third of the world’s seawater supply passes daily through narrow waterways separating Iran from the Gulf countries, and attacks on transport in the channel will soon surge in energy prices, analysts said.
Iran previously threatened to close the straits, but is generally believed to have a hard time blocking the waterways completely.
Alternate responses can attack the oil fields and infrastructure of US allies in the region, such as Saudi Arabia and Qatar. Worried about being drawn into conflict, Gulf countries have repeatedly called for an end to hostilities and a return to dialogue.
In a statement Sunday morning, Doha’s Foreign Ministry warned that “dangerous tensions” in the region could have “devastating effects.” Saudi Arabia said it is chasing Iran’s development with “big concerns.”
Analysts at S&P Global Commodity Insights said the oil would open higher on Sunday, but said the rally would be easier by Monday morning if Iran did not respond immediately.
“The key question is what happens next,” said James Bambino and Richard Joswick of S&P. “Does Iran attack US interests directly, or through allied militias? Will Iran’s oil exports be stopped? Will Iran attack shipments in the Strait of Hormuz?”
Even if Iran’s crude oil exports are disrupted, the increase in production from the OPEC+ cartel and the current global inventory means that the oil market will be fully supplied as long as the Strait of Hormuz remains open.
Iran exports about 2 million barrels of oil a day, and around 21 million barrels of barrels pass through the Strait of Hormuz every day from Iran, Iraq, Kuwait, Saudi Arabia, Qatar and the United Arab Emirates.
