Oil prices jumped to their highest levels since last summer amid growing signs the U.S. is preparing a military strike against Iran.
Why it matters: The market sees risks to both Iranian exports but also a conflict that could threaten other supplies from the oil-producing region.
The latest: Prices climbed well over 4% on Wednesday and are rising again on Thursday morning.
- The global benchmark Brent crude is at over $71 per barrel this morning, while the U.S. standard, WTI, is around $66.
State of play: "For oil markets, the concern is clearly what action would mean not only for Iranian oil supply, but also broader Persian Gulf oil flows, given the risk of disruption to shipments through the Strait of Hormuz," ING analysts said in a note on Wednesday.
- Iran exports about 1.5 million barrels per day, mostly to China. But the Strait of Hormuz, the narrow sea passage next to Iran, is a choke point that handles a whopping one-fourth or so of the world's maritime oil trade.
The big picture: Right now there's lots of supply sloshing around what's a pretty soft market marked by modest demand growth and rising output.
- These conditions — and hence rather modest U.S. gasoline prices — expand President Trump's geopolitical running room.
What they're saying: "Geopolitical issues, above all Iran, are the key bullish factor in the oil market at the moment," University of Texas-Austin energy analyst Ben Cahill tells Axios via email.
- "Otherwise there's not a whole lot of price support toward $70 [per barrel]. The slack in this market could embolden the White House," he said.
Yes, but: RBC Capital Markets analysts say there's limited short-term capacity to replace potentially lost barrels if fighting breaks out.
- "We continue to contend that the only meaningful spare capacity is sitting in Saudi Arabia, and if OPEC does decide to bring forward more production in the spring, the cupboard will be exceedingly bare if there are any major supply disruptions stemming from a US/Iran conflict," they said in a new note.
Zoom in: Oil analyst Clayton Seigle of the Center for Strategic & International Studies has mapped out several conflict scenarios and how they could affect prices.
- For instance, if the U.S. or Israel blockade Iranian shipments but its export infrastructure remains intact, he sees a potential — and reversible — $10-$12 per barrel increase. But attacking those facilities would cause a larger rise.
- Iran could attempt to disrupt flows through the Strait of Hormuz, which could see prices rise above $90 — sending U.S. average gasoline prices well above $3 per gallon (they're currently around $2.93, per AAA).
Threat level: A more extreme case could see Iran attacking oil infrastructure like wells and export terminals in major Gulf producing countries, which could bring a "historic" spike to the $130-per-barrel range, he writes.
What we're watching: How U.S. domestic politics factor into the scope and duration of the conflict if the White House indeed attacks Iran, given Trump's aversion to higher gasoline prices.
