Oil Spikes as Middle East War All But Halts Hormuz Ship Strait

Ellen Wald, President of Transversal Consulting, discusses the impact of Iran strikes on oil markets.

Oil surged the most in four years as the first impacts of the war in the Middle East began to be felt, with a near halt to traffic through the Strait of Hormuz and disruption at a big refinery in Saudi Arabia underscoring the threat to supplies in one of the world’s top producing regions.

Brent futures traded about 9% higher after topping $80 a barrel earlier, while diesel futures — the engine of the global economy — jumped more than fifth at one point. A US flagged oil tanker that operates as part of a military fuel supply program was hit in the region, while at least four vessels were targeted on Sunday. Naval forces described the threat as “critical” and swaths of shipowners aren’t transiting.

How quickly tanker traffic can normalize in Hormuz is critical to energy markets because the waterway handles a fifth of the world’s oil and a similar portion of liquefied natural gas. JPMorgan Chase & Co. estimates that a halt lasting 25 days would fill producer nations’ storage tanks, forcing them to cut production. Insurance markets are already scrambling to work out how to price the risk.

In one of the first big impacts on physical oil assets, Saudi Aramco halted operations at its Ras Tanura refinery after a drone strike in the area, according to people familiar with the matter, adding to a spike in fuel prices. Crude flows from the nearby port continued. Natural gas prices soared as Qatar shut the world’s largest LNG export plant.

The publisher of the Middle East’s main oil benchmark said it won’t accept bids and offers for some grades inside Hormuz, underscoring exactly how the conflict is upending the pricing of grades that are key to some of the world’s biggest oil benchmarks. To see financial research from Bloomberg Intelligence, go to BI IRAN​​​​​

Some Iranians took to the streets to celebrate the death of a leader blamed for decades of repression, but large crowds also mourned him and there was no immediate sign of the broad uprising that Trump has called for in recent days.

Monday, Trump didn’t include regime change among the goals of the operation, citing instead the destruction of Iran’s missiles and navy, as well as preventing it from obtaining nuclear weapons and funding terrorism outside its borders. He vowed to continue attacks as long as needed.

“We projected four to five weeks, but we have capability to go far longer than that,” Trump said at a White House event. “Whatever the time is, it’s OK. Whatever it takes.”

Three US fighter jets crashed after being mistakenly shot by Kuwaiti air defenses, but the crews were able to eject from the planes.

Israeli Prime Minister Benjamin Netanyahu said attacks will intensify in the coming days. Israel expanded its campaign to Beirut  after coming under attack from Hezbollah fighters in southern Lebanon, who are allied with Tehran. Brent crude, already up nearly 20% this year, was trading around $77 a barrel after surging the most in four years Sunday. Bloomberg Economics estimates a full closure of the Strait could push oil as high as $108 a barrel. Saudi Arabia shut its biggest oil refinery after a drone attack. Natural gas prices in Europe jumped more than 50% after Qatar, a key supplier, shut production at the world’s largest LNG export facility. Gold and the dollar also rose, and US Treasuries weakened amid fears of rising inflation.

“When you look at past presidents, we’ve never used our full power,” said Jack Devine, former director of operations at the CIA. “We were at the more collegial 7 level. Trump has amped it up to the 10 level. This is a brave new world.”

While Trump has urged protesters who flooded Iran's streets in December and January to seize power, there is no sign that the administration has laid the groundwork for an opposition movement to quickly rise up against the regime.

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