Israel Iran Conflict Drives Oil Prices Up 7% To $70

The escalating conflict between Israel and Iran has now extended to the energy markets, with both sides targeting each other's energy infrastructure in a bid to gain leverage. Following Israel's initial wave of air strikes that decimated Iran's military, reports on Saturday indicated that Iranian energy infrastructure, including the Pars South gas field and oil refineries, was under attack. This move comes as Israeli Prime Minister Benjamin Netanyahu warned that Israel would strike every site and target of the Iranian regime, urging the Iranian people to overthrow their government. Meanwhile, Iran's defense minister accused Israel of crossing "red lines" by launching missiles at civilian areas.

In response, Iran has threatened to close the Strait of Hormuz, a critical chokepoint in the global energy trade. The Strait of Hormuz is a vital waterway through which approximately 21 million barrels of petroleum liquids per day flow, accounting for about 21% of global consumption. Such a closure could significantly disrupt global oil supplies and send prices soaring. Analysts have noted that Iran has few viable military options left and its capabilities have been severely degraded by Israel. However, the potential closure of the Strait of Hormuz remains a serious consideration for Tehran, as it could spike oil prices even higher after they jumped 7% on Friday to more than $70 a barrel.

The escalation of the conflict has raised concerns about potential supply disruptions and their impact on energy markets. Former Deputy Secretary of State Wendy Sherman suggested that Israel's targeting of Iran's oil and economic infrastructure is a signal of the conflict's economic dimension. Meanwhile, analysts have warned that targeting Iran's oil production and export facilities could drive prices to $80-$100 per barrel, leading to historic pump price increases. The worst-case scenario, as estimated by George Saravelos, head of FX research at Deutsche Bank, could see oil prices surpass $120 per barrel if Iranian oil supplies are completely disrupted and the Strait of Hormuz is closed. Such a closure would require significant military resources, including mines, patrol boats, aircraft, cruise missiles, and diesel submarines, and clearing the strait could take weeks or months.

However, there is a low likelihood that Iran would close the Strait of Hormuz, according to Kenneth Pollack, a former CIA Persian Gulf military analyst. Pollack argued that such a move would quickly turn Iran into a "dangerous nemesis" in the eyes of most other countries, potentially leading to Western intervention and even military action to reopen the strait. Pollack also noted that the fear of such a reckless threat to the world's economies could convince Washington that the Iranian regime had to be removed, especially with U.S. President Donald Trump back in office.