Oil prices surge as Iran conflict disrupts key shipping routes

Oil prices soared to their highest levels in nearly four years as tensions between Iran and its adversaries escalated. Iran intensified attacks on oil and transport infrastructure in the Middle East, with Supreme Leader Mojtaba Khamenei vowing to keep the Strait of Hormuz closed, a critical route for oil shipments. North Sea Brent crude surged 9.2% to close at USD 100.46 a barrel, while US light crude WTI climbed 9.7% to USD 95.70 a barrel, marking the highest prices since August 2022.

The conflict has severely disrupted oil traffic through the Strait of Hormuz, where about one-fifth of global oil and natural gas supplies normally pass. Citigroup estimates that the disruption is removing seven to 11 million barrels a day from the market. Oman evacuated all ships from a key export terminal near the strait, and Iranian vessels attacked two fuel tankers in Iraqi waters, setting them ablaze. Chinese refineries have also begun canceling fuel deliveries, according to Bloomberg.

In response to the market turmoil, the International Energy Agency (IEA) announced it would release a record 400 million barrels of oil from emergency reserves, with all 32 member countries unanimously agreeing to the move. Analysts at Bloomberg and Germany’s ifo Institute for Economic Research warn that the reserves could be exhausted in about three months if released at a rapid pace. Clemens Fuest, ifo President, noted that if 25% of usual oil supplies were unavailable due to the war, global strategic reserves would last only three months.

Iran has threatened to escalate its attacks, with spokesman Ebrahim Zolfaghari stating that any vessel or tanker heading to the US, Israel, or their partners would be a legitimate target. He also warned of pushing oil prices up to USD 200 a barrel. The Wall Street Journal reported that Kuwait has begun curbing production at some oil fields due to a lack of storage capacity, further exacerbating the supply constraints.