Oil prices surge near $90 following Israel’s alleged strikes in Iran

April 19, 2024 (MLN): Oil prices jumped after US officials said Israel struck targets in Iran, with traders speculating that a wider regional conflict could endanger crude supplies.

Brent crude traded near $88.9 per barrel, a gain of 2.05% on the day.

While West Texas Intermediate crude (WTI) was at $83.89 per barrel, up by 2.18% on the day.

Global benchmark Brent topped $90 a barrel at one point, before paring gains, after reports of explosions in Iran, Syria and Iraq. Israel launched a strike against Iran, according to two US officials as reported by Bloomberg.

An explosion was heard in the central city of Isfahan, the semi-official Fars news agency said. Nuclear facilities in the city are safe, state television reported.

Traders have been girding for an Israeli response to the Islamic Republic’s unprecedented missile and drone attack last weekend, with the rhetoric between the two escalating as Tehran warned against striking its nuclear facilities.

The Middle East accounts for about a third of global crude supplies.

Haven assets also rose as tensions ratcheted higher.

Gold spiked toward a record, before giving back some of its gains, while the US dollar climbed to a multi-month high.

“Depending on the nature of strikes, we are moving closer toward a scenario where supply risks become a reality,” said Warren Patterson, head of commodities strategy at ING Groep NV in Singapore.

“The market will likely have to start pricing in an even larger risk premium,” he added.

Crude has rallied this year, with gains driven by the worsening hostilities in the Middle East, as well as OPEC+ supply cuts that have tightened the market.

Higher energy prices, if sustained, would boosts risks for the global economy and pose a challenge for central bankers as they seek to tame inflation.

The supply curbs orchestrated by OPEC+, which include cutbacks in Saudi Arabia as well as Russia, mean that the producer group has a buffer of unused capacity of several million barrels a day.

At present, the output restrictions are set to last through the first half of this year.

Among the initial reports about Iran, ABC News, citing an unidentified US official, said Israeli missiles hit a site in the country.

Separately, the Mehr news agency said that flights had been suspended in Tehran, Isfahan, and Shiraz.

Trading volumes spiked, with nearly 400,000 lots of Brent and over 330,000 of West Texas Intermediate traded by about noon in Singapore, far more than usual.

There was also active trading of Brent June and July call options, which profit when prices gain. The premium of call options over put options also surged to the most since early 2022.

“We continue to highlight the heightened risk that this war will move up the escalation ladder,” RBC Capital Markets LLC analysts including Helima Croft said in a note before crude’s spike.

“Oil supplies could be caught in the cross-hairs of this metastasizing conflict,” they added.