Turmoil in oil markets continued on Monday following weekend escalation in the Israel-Iran conflict, with crude prices surging amid fears of supply disruptions in the Middle East.
After Israel’s Friday strikes, Iran launched a series of missile strikes over the weekend targeting major Israeli cities, including Tel Aviv and Haifa. The strikes have resulted in civilian casualties and significant infrastructure damage.
Israel has continued its airstrikes on Iranian military and nuclear facilities, including the Natanz nuclear site and a research facility in Isfahan. Meanwhile, Iran has threatened to block the Strait of Hormuz, through which about 21% of global oil passes.
The heightened uncertainty is driving oil prices higher, with Brent crude surging more than 8% to hit US$75.50 per barrel, and West Texas Intermediate (WTI) climbing to US$72.98 per barrel, a four-month high.
Energy sector sees strong gains
The Australian stock market responded with mixed sentiment, as the S&P/ASX 200 rose 0.1% on Monday, driven largely by gains in the energy sector. Woodside Energy saw a significant increase of 6.5%, while Santos climbed 4.5%, also boosted by news of a A$30 billion takeover proposal from an Abu Dhabi consortium.
Smaller energy producers like Karoon Energy also saw strong gains, with a 9.6% rise. The rally in energy stocks highlights how oil has become a focal point for market participants, as they benefit from rising oil prices in the short term.
However, the broader market is under pressure. While the gains in the energy sector are helping to offset declines, sectors that are more sensitive to higher fuel prices, such as airlines and consumer discretionary stocks, are struggling. Qantas, for example, fell 5.2% due to concerns over rising fuel costs, which could erode margins in the airline industry.
Geopolitical risk and oil supply fears
The risk to global oil supply has intensified as Iran’s actions threaten the stability of key oil shipping routes. The Strait of Hormuz, already a crucial point for oil transit, could be further jeopardised by Iranian retaliation, which could disrupt global oil flows and tighten supply.
Analysts are closely monitoring whether Iran will escalate further by targeting oil infrastructure or increasing pressure on shipping lanes.
While the worst-case scenario remains unlikely, with analysts predicting oil could reach as high as US$120 per barrel in the event of a full-blown supply disruption, the market is preparing for continued volatility. Oil prices historically surge during times of Middle Eastern conflict, and with tensions at a boiling point, the potential for significant price fluctuations remains high.
Gold prices and safe-haven demand
Gold has also risen on the escalation in the Israel-Iran conflict. As a traditional safe-haven asset, gold prices have surged to US$3,430 per ounce, reflecting heightened demand for security amid geopolitical uncertainty.
The rally in precious metals underscores the broader shift towards risk-off sentiment as investors look for refuge from the volatility in energy markets.
Continued volatility and uncertainty ahead
The situation in the Middle East is fluid, with both Israel and Iran continuing their military operations. As Iran vows to retaliate further, the risk of a broader regional conflict remains high.
For the oil market, any disruption in the Strait of Hormuz would be catastrophic for global oil supply, potentially driving prices even higher. In the meantime, energy stocks are benefitting from the surge in oil prices, while the broader market faces headwinds from the inflationary pressures that higher oil prices bring.