Iran launched several hundred different projectiles into Israeli airspace over the weekend, the first ever direct attack on that nation by Iran in history. The term “Middle East tension” is a catch-all for various countries that end up being used as a reason for oil prices to move around, but in this case, the phrase applies. Were Israel to respond with their own direct attacks on Tehran, that would be an escalation, and in the realm of the energy world, would likely cause oil prices to spike more than they have in recent days as the Israel-Hamas war has played out.
Most of Iran’s strikes were intercepted by Israeli defenses, along with support from the United States and other nations, and the hope is that the Biden administration can work with allies including Israel to ease tensions. Analysts in the oil market were mostly concerned with whether there would be further attacks that could cause disruption to oil tankers or other exports out of the region to the rest of the world.
So far, the market isn’t betting on that – Brent crude oil futures are just shy of $90 a barrel and have fallen on the day – essentially saying what we’ve seen so far was anticipated. “This war may move down the escalation ladder if the Israeli government follows the advice of the White House and forgoes retaliatory action,” wrote Helima Croft at RBC Capital Markets, noting that even though “Iranian action was far more expansive than previous reprisals, it was still telegraphed in advance to key actors.”
Iran is one of the region’s largest crude producers, with output of about 3 million barrels per day. Prices have been trending upward for some time as the main Organization of the Petroleum Exporting Countries and allies – known as OPEC+ – have maintained production curbs. The other world producers like the United States and Brazil are still seeing strong growth, but OPEC+ is still 40% or more of the market, which makes their outlook most important, and they see summer demand remaining strong.
