Oil Prices May Surge 10% After U.S. Strike On Iran

Oil prices are expected to surge by up to 10% following the U.S. attack on Iran’s top nuclear facilities. This significant increase is anticipated as investors prepare for potential fallout across the region and possible retaliation from Tehran. However, analysts predict that this spike may be short-lived due to the expected boost in oil output by OPEC+.

The U.S. bombing of Iran’s key nuclear sites has drawn the U.S. into direct offensive operations against Iran, escalating a conflict that began with Israel’s airstrikes a week and a half ago. Iran, being a top oil-producing country, has the potential to disrupt a critical transit point for global oil exports, which has put energy markets under intense scrutiny.

While the initial impact on global markets is expected to be significant, there are factors that could mitigate the long-term effects. Energy analytics firm Kpler noted that a 7-10% gap up in oil prices is likely as risk premiums surge. However, they also cautioned that this spike may not last. Based on the closing price of Brent crude on Friday, a 10% jump would push the global oil benchmark to nearly $85 per barrel.

Iran’s ability to retaliate is seen as constrained. A shutdown of the Strait of Hormuz or attacks on energy infrastructure belonging to the Gulf Cooperation Council are considered highly unlikely. The Strait of Hormuz is a critical choke point in global energy trade, with about 21 million barrels per day flowing through it, equivalent to 21% of global petroleum liquids consumption.

On Sunday, Iran’s parliament approved the closure of the strait, though security officials have yet to sign off on it. Such a closure would involve the use of mines, patrol boats, aircraft, cruise missiles, and diesel submarines, and clearing the strait could take weeks or months. However, closing the strait would also choke off Iran’s own oil exports, more than 90% of which go to China, and devastate the Iranian economy. As a result, closure of the strait is among a range of Iran’s retaliatory options that would put the survival of its regime at risk, meaning Tehran’s response could come elsewhere.

According to the analyst's forecast, an early OPEC+ output boost for August of 411,000 barrels per day or more is increasingly likely. This would add to a series of similar production hikes in recent months, potentially easing any price spikes. Freight disruptions will be a key factor to watch, as the Middle East Gulf and Red Sea face heightened threats from Houthi attacks. Middle distillates, particularly jet fuel, are poised to benefit even more in the West of Suez.