Oil prices surged 10% on Monday as traders reacted to the war in the Middle East and the potential for significant supply disruption from routes that account for around 20% of the world’s oil supply.
Brent Crude was trading 10% higher at $80.12 at the time of writing, while US WTI benchmark oil surged 9% to $73.24.
Such a sharp increase was to be expected given the sheer volume of oil flowing out of the region, and many market participants are taking the increase in stride, outlining the potential for OPEC to fill the gap left by the current conflict.
George Lagarias, Chief Economist at Forvis Mazars, said: “Our base case is that the region and energy markets have prepared for the present eventuality, and it is a matter of time before contingency plans become operational that would allow oil to flow beyond Iranian chokepoints.”
Although the near 10% spike in oil prices is dramatic, there is some degree of containment to the price increase, with analysts pointing to the difficulties for both sides in sustaining the current level of attacks for a prolonged period.
“These logistical constraints likely set a hard deadline for Donald Trump to resolve the conflict one way or another in the coming days,” explained Samer Hasn, Senior Market Analyst at XS.com.
“While a non-stop aerial campaign over Iran aims to suppress missile launches, the President is also incentivized to avoid a prolonged energy-driven inflation wave. Trump is acutely aware that a spike in U.S. pump prices would necessitate a higher-for-longer interest rate environment, which he desperately wants to avoid.”
However, Hasn continues to explain that the real risks of a deeper global oil shock remain.
“If a new red line is crossed, which is specifically the targeting of Iranian production and export facilities more severely, we will enter a much darker phase of the war. In such a scenario, $100/bbl would likely be the minimum target as the IRGC would almost certainly retaliate against GCC energy infrastructure with even greater intensity. The worst-case outcome remains a massive oil leak within the Strait, which could halt navigation for months and force a global economic reckoning.”