US-Iran Conflict Reignites Oil Market: Brent Crude Posts Nearly 16% Weekly Gain, Strait of Hormuz Blockade Risk Triggers Surging "Risk Premium"

Odaily has noted that as fighting escalates between the United States and Iran, concerns have risen in the market that higher energy prices could sustain high inflation and increase the likelihood of further Federal Reserve rate hikes. As a result, crude oil and refined oil futures surged strongly on Friday and closed sharply higher for the week.

On Friday, Kuwait stated that Iran attacked civilian infrastructure, including power and seawater desalination plants, marking a significant escalation in the region’s conflict. Iran also announced that it attacked U.S. targets in Bahrain, Jordan, Kuwait, Oman, and Qatar, and carried out its first direct strike on Syria.

The United States said that after it reimposed a maritime blockade on ships entering and leaving Iranian ports, the U.S. military struck several bridges inside Iran to disrupt supply routes to a strategic port and naval base in the Strait of Hormuz.

Further escalating fears of conflict, Yemen’s Houthi forces may move to block shipping through the Red Sea via the Bab-el-Mandeb Strait. With the Strait of Hormuz closed, Saudi Arabia has rerouted its oil exports to this strait.

According to Reuters, since the war began, Saudi Arabia has rerouted more than 70% of its normal daily crude oil exports to the Red Sea port of Yanbu. In recent weeks, Yanbu shipments have averaged 4 million barrels per day, up from 973,000 barrels per day in the same period last year.

Barclays analyst Amarpreet Singh stated in a report that the renewed escalation of the situation "poses significant upside risks to energy prices given inventories are at their lowest levels in years and most of the Strategic Petroleum Reserve (SPR) releases have already occurred." “As things stand, we believe the oil market’s perception of the potential impact on inventories remains overly optimistic (complacent).”

On Friday, August crude oil futures for delivery on the New York Mercantile Exchange soared 4.5% to $82.49 per barrel; September Brent crude futures on the Intercontinental Exchange surged 4.6% to $88.10 per barrel.

For the week, New York crude oil futures and Brent crude oil futures rose by 15.5% and 15.9% respectively, marking the largest weekly gains for both benchmark crude oils since late April.

Since the fighting cut off Persian Gulf supplies, due to low inventories, gasoline prices have risen even more than crude oil prices. RBOB gasoline futures closed at $3.3927 per gallon on Friday, the highest level since May 22, while diesel futures soared more than 14% this week and the average retail price nationwide rebounded above $5 per gallon.

In addition to concerns about supply disruptions in the Strait of Hormuz, tight supply during the Northern Hemisphere’s peak summer travel season also supported gasoline and diesel prices.

According to Novi Labs data, so far this month the gasoline crack spread—a measure of the difference between gasoline and crude oil prices—has averaged $0.90 per gallon, the highest level in four years.

August natural gas futures for delivery on the New York Mercantile Exchange rose 1.8% on Friday to $2.9110 per million British thermal units (MMBtu), but fell 1% for the week.