Oil prices climb as Iran missile attack prompts supply fears

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Oil prices rose again on Wednesday after Iran’s missile attack on Israel deepened fears that the Middle East was heading for a full-scale regional war that could disrupt energy supplies to the global market. 

Brent crude, the international benchmark, was up 2.3 per cent at $75.23 a barrel after jumping as high as $75.55 in early London trading. US benchmark West Texas Intermediate was up 2.3 per cent at $71.42 a barrel after hitting $71.94 on Tuesday.

Traders and analysts warned of potential disruption to energy exports if the violence in the Middle East widened, saying energy infrastructure across a region that accounts for about a third of global oil production could be at risk.

“Iran sits astride the world’s most strategic energy region, oil- and gas-production facilities and transit choke points,” said Bob McNally, founder of Rapidan Energy Group and a former adviser to president George W Bush.

“So, when Iran is involved in a shooting war with its neighbours, you have to price in some geopolitical disruption risk, especially when it comes to Israel,” he added.

Israel’s Prime Minister Benjamin Netanyahu vowed to retaliate against Iran after the Islamic republic fired scores of ballistic missiles at Israel on Tuesday.

Iran, an Opec member that exports about 1.7mn barrels of oil a day, on Tuesday warned Israel of more “devastating” attacks if it responded to the missile barrage.

Helima Croft, an analyst at RBC Capital Markets and a former CIA analyst, said oil traders needed to assess whether Israel would retaliate by directly targeting critical Iranian military and economic assets, including energy infrastructure.

“In April, the Israelis opted for a muted response to the Iranian
missile and drone strikes. And yet in the past two weeks the [Netanyahu government] has demonstrated an increasingly high-risk tolerance for escalatory actions to achieve their strategic objectives.”

Oil prices rallied more than 30 per cent after Israel last launched a ground offensive into Lebanon in 2006 to a then record of $78 a barrel as analysts again feared an all-out war in the Middle East that would disrupt supply.

Now, two years of production cuts by Opec+ producers mean the group is sitting on more than 5mn barrels a day of spare capacity, which could be brought back if Iranian supply was suddenly disrupted.

Aside from its significance as a major oil exporter, Iran also borders the Strait of Hormuz, the narrow chokepoint through which Opec+ members including Saudi Arabia and the UAE export energy. If the escalating conflict begins to disrupt shipping through the strait, that could hinder the ability of those producers to make up for any decline in Iranian output, analysts said.

Iran’s attack came as Israeli forces moved into Lebanon after days of bombardment, including a missile strike on Friday that killed the leader of Hizbollah, one of Tehran’s proxies in the region.

On Tuesday the US said it was making preparations to defend Israel. Washington has already ordered more troops to the region in an effort to deter further escalation. The US has also struck targets in Yemen, Iraq and Syria in recent months.  

“This fresh escalation is serious and justifies oil’s jump,” said Bill Farren-Price, a veteran oil market watcher and senior research fellow at the Oxford Institute for Energy Studies.

“But we’ve been here before — the conflict needs to show signs of spreading to the Gulf if it is to ignite a broader and sustained oil price rally. At the moment it has not.”