Oil prices set for biggest weekly rise in two years on Middle East tensions

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Oil prices are headed for their biggest weekly rise in two years as traders speculate on the possibility of strikes on energy infrastructure by Israel or Iran.

Brent, the global oil benchmark, was trading just below $79 a barrel on Friday, up almost 10 per cent since last Friday following a blistering four-day rally.

The moves have come as escalating conflict in the Middle East prompts concerns about a disruption to supplies in a region that produces a third of the world’s crude.

US President Joe Biden on Thursday said Israel had discussed striking Iran’s oil facilities in retaliation for an Iranian missile barrage fired at Israel this week.

The Islamic republic exports 1.7mn barrels of oil a day, mainly from a terminal on Kharg Island, about 25km off the country’s southern coast.

The growing concern over disruption to oil supply from Iran and through the Strait of Hormuz has pushed Brent to its largest weekly gain since October 2022.

“The market was too comfortable overlooking geopolitical risks,” said Ben Luckock, global head of oil at Trafigura. “Where the price goes from here will be determined by what Israel specifically targets within Iran. We are all watching and waiting.”

Analysts and traders fear that Israel could target Kharg Island and Iran and its proxies could respond by striking energy operations in the region.

Brigadier General Ali Fadavi, deputy commander of Iran’s elite Revolutionary Guards, warned on Friday that if Israel made any “mis-step” Tehran would “target all its energy sources, including power stations, refineries and gasfields”. 

In an interview with Al Mayadeen, a Lebanese TV channel close to Iran and Hizbollah, he said that while Iran had lots of energy infrastructure Israel had much less and it was vulnerable to “a precise and devastating strike”.

The Iraqi militant group Kata’ib Hizbollah, which is backed by Iran, said in a statement on Thursday that an “energy war” would lead to a huge loss of supplies for the world but hinted it would be other countries’ ability to export that would be targeted.

“If the energy war starts, the world will lose 12mn b/d of oil,” Kata’ib Hizbollah said on Telegram. “And as Kata’ib Hizbollah said before, either everyone enjoys [the oil] or everyone is deprived.”

The oil rally has been tempered so far by the spare production capacity currently held by Opec+ members after two years of cutting output to prop up prices. In total, more than 5mn b/d of Opec+ production, mainly in Saudi Arabia and United Arab Emirates, is offline and could be brought back to balance the market if supply from Iran or elsewhere is disrupted.

The most significant disruption would come if Iran sought to block tanker traffic through the Strait of Hormuz, dubbed “the world’s most important oil transit chokepoint” by the US Energy Information Administration. About a fifth of world oil supplies pass through the Strait every day, including production from Opec members Saudi Arabia, UAE, Kuwait and Iraq, in additional to liquefied natural gas from Qatar.

A full closure of the Strait has never occurred before. If it happened it would lead to “runaway oil prices” of $150 a barrel or higher, said Claudio Galimberti, chief economist at Rystad Energy.

“If it just lasts for 10 days it’s going to be an enormous disruption, if it lasts for a month it’s going to be killing the global economy.”

During the Iran-Iraq war in the 1980s, Tehran mined the Strait in what became known as the tanker wars, but any effort to choke supply would also affect Iran’s own ability to export.

“The Strait of Hormuz is important for us because we are sending most of our oil through there, so any instability there would have consequences on us. Right now we are not going to think about that, but if things get worse, certainly those who have the upper hand in persuading the leader to radicalise the issue will think about this,” an Iranian official said. “That is a worst-case scenario, if this exchange of attacks continues.”

Iranian officials have also been discussing the crisis with their energy-exporting Gulf neighbours, with Iranian President Masoud Pezeshkian meeting Qatar’s emir Sheikh Tamim bin Hamad al-Thani and Saudi foreign minister Prince Faisal bin Farhan in Doha this week.