(Bloomberg) - Global oil markets face another week of turmoil after a US attack on Iran’s main export hub heightened risks to supply across the Middle East, and deepened concerns over a conflict that’s already upended energy flows.
President Donald Trump said late on Friday that US forces had struck military targets on the vital Kharg Island and threatened to extend attacks to energy infrastructure if Tehran interferes with transit through the Strait of Hormuz — the narrow waterway connecting the Persian Gulf with the world. Traffic through Hormuz has all but halted since the war began and Iran’s supreme leader said last week the strait should remain shut if the conflict continues.
With every passing day, the impact of the conflict on the oil market is becoming more acute. While countries with the ability to do so are racing to find workarounds for Hormuz, the conflict has already created a massive supply disruption that is sending premiums for real-world barrels and fuel prices soaring.
Iran said strikes on oil infrastructure at Kharg Island would lead to retaliation against US-linked energy facilities in the region. Trump said Iran is ready to make a deal to end the war but the US wants better terms, signaling no letup in the conflict.
In the United Arab Emirates, loading operations at the key hub of Fujairah were interrupted after a drone strike in the early hours of Saturday, choking off shipments from country’s only export route while the Strait of Hormuz is blocked. Activities there resumed on Sunday.
“I don’t think markets will take too kindly to the latest developments,” said Tim Waterer, chief market analyst at KCM Trade. “I expect another nervy start to the week with Kharg Island’s fate unclear, given its importance to global energy supply.”
In a sign of how the war is squeezing global crude supply, the International Energy Agency said Sunday that oil from an unprecedented stockpile release will be made available immediately in Asia. The agency’s statement came after it received implementation plans for a record 400-million-barrels reserve release announced last week.
While supplies for Asia will begin to flow right away, barrels for Europe and the Americas will only become available from the end of March. Crucially, there was no update on the pace at which those volumes would be released.
Crude benchmark Brent rallied 11% last week, hitting a high of $119.50 a barrel — back toward levels seen after Russia’s invasion of Ukraine — before closing just above $103. It was the most volatile for the European marker since futures began trading in 1988.
“We are still hurtling down the highway at breakneck speed, in the left lane, with no sign of when we’re going to be able to veer off onto the exit ramp,” said Stephen Schork, founder of Radnor, Pennsylvania-based Schork Group Inc., adding he would not be surprised to see crude open above $117 a barrel, and “we could even possibly open up above that number.”
Traffic through Hormuz — a vital maritime thoroughfare — has remained at a near-standstill since fighting began, with just a handful of vessels, mostly Chinese and Iranian ships, passing through. Most recently these included two India-bound vessels carrying liquefied petroleum gas and a Greek-run tanker.
President Trump intensified calls at the weekend for the choke point to reopen, saying warships will “hopefully” be sent to the area to help commercial vessels pass through. He gave little detail, beyond saying that he hoped China, France, Japan, South Korea and the UK would send ships.
Energy Secretary Chris Wright said on Thursday that the US Navy could only start escorting tankers through Hormuz by the end of this month, adding that it wasn’t ready to start such operations now.
Highlighting the difficulties of Trump’s plan, a senior Japanese official said any decision to dispatch military vessels to escort ships would face hurdles. “It is something that should be judged carefully,” ruling Liberal Democratic Party policy chief Takayuki Kobayashi told broadcaster NHK on Sunday.
Disruptions are rippling beyond crude, with products surging. India has started rationing gas supplies to industries, while jet-fuel costs have soared, and shortages of natural gas stand to limit fertilizer output, with poorer Asia nations bearing the brunt. In the US, retail prices of gasoline and diesel have rallied.
Kharg Island is a vital facility for Tehran as it handles most of the country’s crude shipments. In announcing the strike, Trump said military facilities there had been “obliterated”. Iran’s Fars News Agency reported that exports were continuing as normal following the attack.
“While crude exports from Iran’s Kharg Island continue, market participants continue to await for a de-escalation of the conflict,” said Giovanni Staunovo, a commodity analyst at UBS Group AG. “With oil flows through the Strait of Hormuz still restricted, the path of least resistance for oil prices remains to the upside.”
By Rong Wei Neo, Robert Tuttle and Alex Longley
With assistance from Aya Wagatsuma
