Iran vs Israel: The Middle East ‘power keg’

The front-month ICE Brent contract surged at the beginning of this month due to concerns that the Middle East conflict would “spill over” into neighbouring oil-producing countries.

PHOTO: Flags of Iran and Israel. Getty Images

Brent gains have been underpinned by risk premium scenarios where the conflict between Israel and Hamas potentially spills into neighbouring oil-producing nations such as Iran and Saudi Arabia.

Despite the initial price drop following Israel's strike on an Iranian consulate in Syria on 1 April, prices surged once again after Iran launched retaliatory attacks on Israel in response to the consulate attack, JP Morgan’s global market strategist Jack Manley said.

Iran retaliated with a barrage of missiles towards Israel on 13 April, of which “nearly all of Iran’s missiles and drones were successfully intercepted,” Manley said. However, the possibility of a larger Israeli response remains, which could jeopardise Iran or Saudi Arabia's oil production, potentially causing Brent prices to rise in anticipation of such a scenario.

Brent crude futures surpassed $92/bbl last week due to the same geopolitical tensions, Manley said. “The short answer is that geopolitical tension is difficult to incorporate into any outlook [price forecast], as so much of it is inherently unpredictable,” he noted.

Stricter Iranian sanctions

The possibility of additional supply cuts looms as sanctions on Iranian oil remain a key concern, market analysts said. The US already has oil sanctions in place against Iran.

Lawmakers in Washington are “considering a bill called the Iran-China Energy Sanctions Act,” ING Bank’s head of commodities strategy Warren Patterson said. This bill aims to restrict Iranian oil flows to China.

Additionally, the European Union (EU) and its allies could impose multilateral sanctions on Iranian oil to further crack down the country’s oil revenues, Patterson added.

“The US and Europe are looking at potentially imposing stricter sanctions against Iran following the attack,” he noted.

“Losing in the region of 700,000 b/d of Iranian oil supply would be enough to push the oil market into small deficit over the second half of the year, which would imply ICE Brent averaging $92/bbl in 4Q24 [fourth quarter of 2024],” Patterson added.

By Aparupa Mazumder 

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