The Israel-Iran war: its impact on the oil market

An oil tanker in the Strait of Hormuz (by Adobe)

The unprecedented Israeli and US attack on Iran a few days ago has raised the possibility of a sharp rise in petrol prices. With the summer driving season underway, gasoline prices have been low and stable so far. Ahmed Abdel Rahman writes. 

Relatively low petrol prices in the US have helped lower inflation and allay consumer fears of significant tariff hikes. While petrol prices tend to rise slightly during the warmer months as people begin their summer holidays, everything has changed since the surprise Israeli strikes on Iran, followed by the attacks by the US and the Iranian response.

Analysts say the severity of the Iranian response, and whether it affects the flow of oil from the Middle East, will determine the direction of petrol prices. Oil prices immediately rose as the market prepared for a wider conflict, one that threatens vital energy supplies in the region. The price of US crude rose as much as 14 percent overnight before retreating. Days ago, crude oil prices rose 6 percent, on track for their largest daily increase since April 2023. Over the week starting 16 June, oil prices have risen by about 12 percent, their highest level since October 2022, when OPEC drastically cut production.

In a recent research note, Patrick De Haan, vice president of oil analytics at GasBuddy, an oil-tracking platform, said: "We're still in the thick of it, but Iran describing the Israeli strikes as a declaration of war doesn't bode well for oil flows. He said gasoline prices will likely rise over the next few weeks by between 10 and 25 cents per gallon.

The national average price of regular gasoline was USD3.13 per gallon last Friday, according to the American Automobile Association (AEA). This is down from $3.16 a month ago and significantly lower than the $3.46 level a year ago.

However, petrol prices are likely to rise significantly in the coming days due to higher crude oil prices. "I expect gasoline prices to rise, but not to record levels," De Haan said. But the risk is that there could be an escalation of incidents in the Middle East. Will the violence spread? Will oil flows be affected?

There is still considerable uncertainty about how high petrol and oil prices will rise. Analysts warn that if Iran escalates the situation significantly by attacking regional energy infrastructure or US military personnel, prices could spike significantly.

In a note to clients, Helima Croft, head of global commodity strategy at RBC Capital Markets, said: "Oil prices have risen sharply, and their ultimate fall will likely depend on whether Iran revives its 2019 strategy and targets oil tankers, pipelines, and key energy facilities across the region."

However, the greater fear is that the ongoing war between Iran and Israel could spill over into the Strait of Hormuz, the narrow waterway separating the Persian Gulf from the world's oceans and the world's most important oil chokepoint. Iran has previously threatened to do so.

"In the unlikely scenario that Iran disrupts flows through the Strait of Hormuz, we could see a significant supply shock and a sharp spike in oil prices," said Jorge Leon, head of geopolitical analysis at Rystad Energy. This is because approximately 21 million barrels of oil pass through the Strait of Hormuz daily, representing about one-fifth of daily global consumption, according to the US Energy Information Administration.

"Any effort to disrupt shipping through the Strait of Hormuz would also face difficulty in dealing with the US Navy, which is stationed nearby in part because of this threat. "It would be extremely difficult for Iran to close the strait for a prolonged period, given the presence of the US Fifth Fleet in Bahrain," Croft said. However, she noted that Iran could attack oil tankers and mine the waterway to disrupt traffic.

Goldman Sachs estimates that oil prices could exceed $100 per barrel if there were a prolonged disruption in the Strait of Hormuz, as such an unlikely event could prevent major OPEC producers from increasing production. It considers a disruption to the Strait of Hormuz "much less likely," and the bank only slightly raised its summer oil price forecast.

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