Oil prices continue climbing as tensions between Israel and Iran. Here’s the worst thing that could happen to markets.
Oil prices rose further on Monday as the Middle East gets increasingly closer to a regional war between rivaling Israel and Iran. Last week, Israel made clear it would respond to Iran’s direct missile attack on October 1st.
That attack was in response to Israel’s killing of Hezbollah leader Hassan Nasrallah and the subsequent invasion of Lebanon. The Iranian attack caused the death of one Palestinian civilian while two Israelis and two Jordanians were lightly injured.
Brent, the global benchmark of oil prices, rose by more than 8% last week. The West Texas Intermediate gained over 9.1%.
On Monday, Brent prices surged by another 3.36%, breaching the $80 per barrel level. WTI, on the other hand, jumped by 3.50% on Monday to $77/barrel.
Oil prices have yet to break their 2024 highs when Brent breached $90 per barrel after Iran attacked Israel last April.
In April, however, Israel did not respond to the attack, and oil prices eventually cooled. If an all-out war broke out between the two Middle Eastern powers, oil prices could climb to $200 per barrel, analysts say.
“We do really have to see what the Israelis hit, what would the Iranian response mechanism be,” Croft told CNBC. “But certainly we have not been closer to a regional war in a long time.”
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“Worst case scenario”
Iran is one of the world’s largest oil producers. Last week, US President Joe Biden said he was “discussing” with Israeli PM Benjamin Netanyahu the possibility of hitting Iranian oil facilities.
Then, on Friday, Biden said he ruled the option out.
Nevertheless, an attack on crucial oil facilities like Kharg Island, where 90% of Iranian oil passes through, could significantly disrupt the global crude market.
Iran would almost definitely respond to this provocation. Teheran has the possibility to block the Hormuz Strait, where most of the Persian Gulf’s oil passes through. Crude extracted in Iran, Kuwait, Saudi Arabia, the UAE, and other Persian Gulf countries is forced through this narrow waterway before reaching the world’s oceans.
This, according to the vice president of oil markets at Wood Mackenzie Alan Gelder, would be the “ worst case scenario ” for the world economy.
The United States is just exiting a three-year monetary tightening cycle. The Federal Reserve cut interest rates by 50 basis points as inflation is cooling in the world’s largest economy. Any disruption in the world’s oil market could send prices skyrocketing again, increasing inflation worldwide.
As is often the case, similar disruptions could have larger ripple effects on global history when they happen during a US election year.
