Brent Surpasses $100 as Middle East Conflict Escalates

Since late May, both benchmarks had generally remained below the psychologically important $100-a-barrel level amid expectations that the conflict would remain contained. Optimism had risen in particular after the United States and Iran reached a temporary agreement to halt attacks, despite failing to reach a permanent peace accord.

However, this dynamic has begun to change recently with the resumption of strikes. Iran said today that it attacked 10 ships near the Strait of Hormuz, while the United States sank five Iranian oil tankers, in a sharp escalation of the six-month-old war.

Ole Hansen, head of commodity research at Saxo Bank, said, "Brent breaking above and returning to the $100 level reflects a market that increasingly has to change its view on the longevity of the Middle East crisis and its impact in curbing supplies from the region."

Futures prices are moving closer to physical crude and fuel market prices, where the reality of supply tightness has been evident throughout most of the conflict.

Since the war on Iran erupted on February 28, Brent surged as high as $126.41 a barrel at its peak on April 30, but only briefly touched $100 a barrel in late July after falling below that level in late May.

*Rising Supply Risks

Shipping volumes through the Strait of Hormuz remain well below their pre-war peaks. The passage used to carry about a fifth of global oil and gas supplies, making it pivotal for energy trade worldwide.

Dennis Kissler, senior vice president of energy trading at BOK Financial, said, "Near-term fundamentals have abruptly shifted back to tighter supplies, and tit-for-tat strikes between the U.S. and Iran now appear to be a fixture at a time when the prospect of a peace deal is fading."

The attacks have reignited concerns over attempts to use the strait. Preliminary data from shipping tracker Kpler showed that six commodity-laden vessels crossed the strait yesterday, Tuesday, down from nine the previous day and less than the average of about 12 ships over ten days.

Claudio Galimberti, chief economist at Rystad Energy, said that between 8 million and 9 million barrels per day were passing through Hormuz in the week before fighting resumed on August 30, double the volume of the previous week, but flows have recently dropped to less than 2 million barrels per day.

Officials said a tanker carrying about 2 million barrels of Iraqi fuel oil was targeted by a drone in Iraqi territorial waters today, while the United Kingdom Maritime Trade Operations (UKMTO) reported that several commercial vessels in the Gulf came under fire overnight, causing them to halt.

Peninsula, the charterer of the vessel, said today that a crew member was killed in an incident involving the Gibraltar-flagged product tanker Hercules Star while it was anchored off Dubai.

Hamad Hussain, climate and commodities economist at Capital Economics, said, "The main risk is whether the latest attacks on oil tankers will lead to a decline in ship-to-ship transfers in the Gulf of Oman, which until now have played a key role in supplying oil to global markets and capping price spikes."

Attacks by Iran-backed Houthi rebels in Yemen this week on Saudi energy facilities have sparked fires at oil installations, threatening a massive widening of the conflict. The attacks also threaten crude shipments through the Red Sea, which serves as a vital alternative route to the Strait of Hormuz.

Daniela Hathorn, market analyst at Capital.com, said, "The Houthi attacks on Saudi energy facilities have widened the scope of the threat, raising concerns that disruptions will extend far beyond Iranian supplies to infrastructure and alternative routes that have helped keep Gulf crude flowing."

*Fuel and Physical Crude Already Above $100

The U.S. Energy Information Administration (EIA) raised its oil price forecasts for this year and next, amid a rapid depletion of global inventories resulting from declining Middle East supplies due to the war.

According to LSEG data, the Brent benchmark, which prices about two-thirds of the world's oil supplies, has remained above $100 a barrel since September 3.

Meanwhile, consumers have paid the equivalent of more than $100 a barrel for oil in the form of refined fuels such as gasoline and diesel for much of this year, as conflicts triggered a global refining crisis that drove fuel prices sharply higher even relative to crude. The average U.S. gasoline price currently hovers around $4.22 a gallon, while diesel prices are hitting unprecedented levels approaching $6 a gallon.