Since the war began on Saturday, tankers and container ships have avoided the Strait, not only because of the risk of being fired upon by Iran, but due to soaring shipping rates and cancelled insurance for vessels travelling through the waterway. Meanwhile, Iranian media is reporting that a senior Iranian Revolutionary Guards official said the Strait is closed and any ship attempting to pass through it will be attacked.
From Containment to Escalation
Prices gapped higher early Sunday as traders priced in the immediate impact of Saturday’s attack. The market retreated from its intraday high on Monday as the war appeared to be contained to a specific region. But since that initial reaction, the war has expanded with Iran widening its response to neighboring countries.
Prior to the start of the war, crude oil traders had priced in the possibility of a shutdown of the Strait of Hormuz, but now they have to take into consideration Iran’s attacks on energy infrastructure in the region.
Production Shutdowns Rattle the Market
The response from the countries being fired upon is contributing to today’s bullish price action. There are reports that Qatar has shut down LNG production and Saudi Arabia also halted activity at its biggest refinery. Additionally, Israel has reportedly stopped production in some gas fields and output in Iraqi Kurdistan has “virtually ceased,” according to Reuters.
The Road to $100 Oil
Prices around the world are soaring, particularly in the U.K., Europe and Asia, and are expected to remain elevated over the coming days. Today’s price action likely reflects traders hedging the short-term outlook of the situation. As further concerns are raised and if the conflict continues to spread and escalate, prices will continue to rise and the odds of a prolonged energy disruption will jump. It’s the potential for damaging attacks on infrastructure that could eventually send crude oil prices to $100 or beyond.
More Information in our Economic Calendar.
