Oil prices set biggest weekly gain in two years on Middle East tensions

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Oil prices are headed for their biggest weekly gain in two years as traders speculate on the possibility of strikes on energy infrastructure by Israel or Iran.

Brent, the global oil benchmark, traded above $78 a barrel on Friday, up more than 9% from last Friday, following a strong four-day rally.

The moves come as escalating conflict in the Middle East raises concerns about a supply disruption in a region that produces a third of the world’s crude.

US President Joe Biden said on Thursday that Israel had discussed striking Iran’s oil facilities in retaliation for a barrage of Iranian missiles fired at Israel this week.

The Islamic Republic exports 1.7 million barrels of oil a day, mainly from a terminal on Kharg Island, about 25 km off the country’s southern coast.

Growing concern about disruptions to oil supplies from Iran and through the Strait of Hormuz pushed Brent to its biggest weekly gain since October 2022.

Analysts and traders fear Israel could target Kharg Island and Iran, and its proxies could respond by striking energy operations in the region.

Brigadier General Ali Fadavi, deputy commander of Iran’s Revolutionary Guards, warned on Friday that if Israel made any “missteps” Tehran would “target all its energy sources, including power plants, refineries and gas fields”.

In an interview with Al Mayadeen, a Lebanese television channel close to Iran and Hezbollah, he said that while Iran had plenty of energy infrastructure, Israel had much less and was vulnerable to “a precise and devastating strike “.

Iraqi militant group Kata’ib Hizbollah, which is backed by Iran, said in a statement on Thursday that an “energy war” would result in a huge loss of supplies to the world, but suggested that it would be the ability of other countries to export this. would be targeted.

“If the energy war starts, the world will lose 12 million b/d of oil,” Kata’ib Hezbollah said on Telegram. “And as Kata’ib Hizbollah said earlier, either everyone enjoys (oil) or everyone is deprived.”

Oil’s rally has so far been tempered by spare production capacity currently held by OPEC+ members after two years of output cuts to prop up prices. In total, more than 5 million b/d of OPEC+ production, mainly in Saudi Arabia and the United Arab Emirates, is offline and could be brought back to balance the market if supply from Iran or elsewhere is cut.

The most significant disruption would occur if Iran tried to block tanker traffic through the Strait of Hormuz, called “the world’s most important oil transit choke point” by the US Energy Information Administration. About a fifth of the world’s oil supplies pass through the strait each day, including production from OPEC members Saudi Arabia, the United Arab Emirates, Kuwait and Iraq, in addition to liquefied natural gas from Qatar.

A complete closure of the strait has never happened before. If it did, it would lead to “runaway oil prices” of $150 a barrel or more, said Claudio Galimberti, chief economist at Rystad Energy.

“If it lasts only 10 days, it will be a huge disruption, if it lasts a month, it will kill the global economy.”

During the Iran-Iraq war of the 1980s, Tehran mined the strait in what became known as the tank wars, but any effort to choke off supplies would also hurt Iran’s ability to export.

“The Strait of Hormuz is important to us because we send most of our oil through there, so any instability there would have consequences for us. At the moment we will not think about it, but if things get worse, surely those who have the power to persuade the leader to radicalize the issue will think about it,” an Iranian official said. “This is the worst case scenario, if this exchange of attacks continues.”

Iranian officials have also discussed the crisis with their Gulf energy-exporting neighbors, with Iranian President Masoud Pezeshkian meeting in Doha this week with Qatari Emir Sheikh Tamim bin Hamad al-Thani and Saudi Foreign Minister Prince Faisal bin Farhan .