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How a flare-up in Mideast conflict could affect oil prices

Prices could skyrocket if Iran closes the Straits of Hormuz

The current conflicts in the Middle East are threatening to send fuel prices skyward if the tensions between Iran and Israel ratchet up and disrupt global supplies.

Oil market analysts raise the concern that as with the Russian invasion of Ukraine, further conflict has the potential to destabilise oil prices and disrupt supply chains.

If Israel hits back at Iran’s weekend drone and missile attack and Iran retaliates by disrupting the Strait of Hormuz, global oil markets will face a major choke point, they argue. But such a scenario could be mitigated by exporters using more time consuming routes, but the damage, they said.

However, despite the build-up in tensions, oil prices fell to a three-week low on Thursday, extending losses on hopes of easing tensions in the key producing region of the Middle East, while investors turned their focus to a bleaker demand picture.

Brent futures were down 60 cents, or 0.7 per cent, at $86.69 a barrel while US crude futures traded 53 cents lower, or 0.6 per cent, at $82.16 a barrel at 1135 GMT. Both were down for a fourth straight session. Prices were down more than $1 at their intra-day low and have slumped around 4.0 per cent so far this week. “This is because investors are unwinding the geopolitical risk premium in oil prices on the perception that any Israeli retaliation to Iran’s attack on April 13 will be moderated by international pressure.

The Middle East accounts for 30 per cent of global crude oil production. Among the top 10 oil-producing countries of the world, five are in the Middle East. Saudi Arabia is the largest oil producer, contributing over 12 per cent of the global crude production.

“Any attack on oil production or export facilities in Iran would drive the price of Brent crude oil to $100, and the closure of the Strait of Hormuz would lead to prices in the $120 to $130 range,” Andy Lipow, president of Lipow Oil Associates, was quoted by CNBC as saying.

According to the World Economic Forum, the current 13 members of Opec produce about 40 per cent of the world’s oil, accounting for about 60 per cent of the petroleum traded globally.

Simone Tagliapietra, a senior fellow at Brussels-based think tank Bruegel, was quoted by CNN that Iran has the capability to attack oil tankers passing through the strait using drones, missiles or submarines. A worst-case scenario would entail a total blockade of the strait by Tehran, though the likelihood of either of these outcomes is currently low, he said.

“It is the most significant choke point in the global oil market,” Richard Bronze, co-founder and analyst at data firm Energy Aspects, told CNN. “Any significant disruption would have a huge impact on global oil supplies and oil prices as a result.”

Disruption or blockages to traffic in the Strait of Hormuz would be a game-changer. “It’s the main or only route for the Middle Eastern oil exporters,” including Opec members Saudi Arabia, the UAE, and Kuwait.

Over the medium-and long-term, only the IEA sees global oil demand peaking before 2030 while Standard Chartered has predicted global oil demand will hit 110.2 million barrels per day (bpd) in 2030 and increase further to 113.5 million bpd in 2035.

The Paris-based energy watchdog predicted that global oil demand in 2025 demand will be 1.147 million bpd higher than 2024 levels, higher than the 1.0 million bpd estimate it had released in June 2023. Other leading agencies have predicted even higher demand growth in 2025: the EIA forecast is 1.351 million bpd, Standard Chartered’s forecast is 1.444 million bpd while the Opec Secretariat has predicted a 1.847 million bpd increase in demand.