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Oil prices hit a five-month high before giving up their gains on Monday, after an immediate Iranian response to US strikes on its nuclear facilities failed to materialise, leaving crude supply from the Middle East still unaffected by the escalating conflict.
Brent crude, the international oil benchmark, rose as high as $81.40 a barrel when the market opened on Monday in Asia. But it later dropped to trade roughly flat at $77.04 in London.
The US marker, West Texas Intermediate, rose as much as 4.6 per cent to $78.40 before erasing most of those gains to trade up 0.3 per cent at $74.13.
Oil prices have risen about 10 per cent since Israel launched its first surprise attack on Iran 10 days ago. However, global crude prices are still lower than they were in January, largely because supply from the region has not yet been affected.
“So far, not a single drop of oil has been lost to the global market,” said Bjarne Schieldrop, chief commodities analysts at SEB. “The market is still on edge awaiting what Iran will do,” he said.
Iran’s top military commander, Major General Abdolrahim Mousavi, has said Iran’s forces are entitled to retaliate against US interests, adding that America’s “illegitimate and aggressive proxy, Israel, will be punished”.
Further moves in the oil price this week will depend on the nature of that retaliation and whether or not the Islamic republic or its proxies, such as the Houthis, target energy infrastructure or shipping, analysts said.
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 analysts believe that it would struggle to completely block the waterway because of the presence of the US Navy’s Fifth Fleet in Bahrain.
“Security officials maintain that it would be difficult for Iran to fully close the Strait of Hormuz for an extended period,” said Helima Croft, a former CIA analyst who is now at RBC Capital Markets. “That said, multiple security experts contend that Iran has the ability to strike individual tankers and key ports with missiles and mines,” she added.
Iran also uses the waterway to ship its oil to China and other buyers.
Two tankers heading into the Gulf have made last-minute changes of course to avoid the strait. The Coswisdom Lake turned around at 15.30 GMT on Sunday at the narrowest point of the strait, according to Marine Traffic, before making another turn and heading into the Gulf. The South Loyalty turned around three hours earlier and is anchored off Khor Fakkan, a town in the United Arab Emirates.
An alternative response by Iran could see it 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 had predicted that Sunday night’s rally in oil prices would ease by Monday morning if there was no immediate Iranian response.
“The key question is what comes next,” wrote James Bambino and Richard Joswick at S&P in a note. “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 were 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. About 21mn barrels from Iran, Iraq, Kuwait, Saudi Arabia, Qatar and the United Arab Emirates pass daily through the Strait of Hormuz.
Analysts said the longer that tensions in the Middle East continued, the greater the risk of a prolonged period of high oil prices, which could lift inflation and dent global economic growth.
“The Trump administration will likely find it difficult to balance crippling Iran’s nuclear ambitions while avoiding a prolonged spike in crude oil prices, in turn, elevating inflation and weakening the US economy,” said Michael Alfaro, chief investment officer at Gallo Partners, a hedge fund focused on energy and industrials.
Additional reporting by William Sandlund in Hong Kong and Robert Wright in London