Iran attacks multiple US allies in conflict-ridden Middle East
A day after Supreme Leader Ayatollah Khamenei was killed in a joint attack with the United States, Israel is carrying out military strikes with Iran.
Oil markets may be volatile for the next few days due to military attacks by the US, Israel, and Iran, but may calm down relatively quickly thereafter.
Analysts expect crude oil, which closed at about $67 a barrel on Friday, to open above $90 a barrel by the end of the week as traders process news that Iranian forces have restricted traffic through the crucial Strait of Hormuz.
But after the initial shock, analysts say the reality is likely to be more nuanced. Here’s what you need to know:
What are the implications of the Strait of Hormuz closure?
Every day, approximately 20% of the world’s oil supply passes through the Strait of Hormuz. Saudi Arabia, Iraq and the United Arab Emirates route most of their oil exports there.
But just because Iran claims to have cut off the passageway to traffic doesn’t necessarily mean a complete shutdown, said oil analyst Patrick de Haan.
“This is the geopolitical reality: the continued closure of Hormuz Island will almost certainly trigger coordinated regional and U.S. engagement to secure maritime access,” de Haan said in an analysis early March 1. “Too much of the world’s economy depends on that corridor for it to remain closed for long.”
He said the market is pricing in higher trading costs and more volatility, but does not expect a complete exit.
Analysts at TD Securities said in a March 1 note that prices could “significantly exceed $100 per barrel” if access to the strait is restricted for an extended period.
On the other hand, the additional costs of dealing with additional risks could evaporate in a matter of weeks once access to the strait is guaranteed and hostilities cease, the TD team wrote.
“If it becomes clearer this week that tensions with Iran will be short-lived, oil prices will return to the 60s,” Rob Summell, portfolio manager at $9 billion investment management firm Tortoise Capital, said in an email to USA TODAY.
Tummel noted that the U.S. energy industry has made the United States the world’s largest producer of crude oil. This means that “oil and gasoline price increases are significantly smaller during major geopolitical events such as this one.”
What about oil from Venezuela?
The United States effectively controls the oil produced in Venezuela, but that does not offset the more than 3 million barrels a day produced by Iran, de Haan said.
“Even in the most optimistic scenario of political stability and investment, it will take years, not weeks, for Venezuela’s production to approach levels approaching the scale of Iranian exports,” he said.
Pump pain?
As USA TODAY reported on Feb. 28, the national average for U.S. gas prices could surpass $3 per gallon for the first time this year on Monday. Prices could reach at least $3.10 to $3.15 per gallon in the coming weeks.
Additionally, gas prices typically rise seasonally around this time of year.
Tummel said he expects gasoline prices to rise at about the same rate as oil prices in the coming weeks. Therefore, if oil prices increase by 10%, gas prices will increase as well.
