Oil prices jump after Iran says critical Strait of Hormuz to remain shut

Oil prices rose sharply on Thursday and hit the key $100 per barrel level, after Iran’s new leader Mojtaba Khamenei warned that a critical waterway for global shipping will remain closed as the U.S. and Israel continue an assault of the country.   

Brent oil futures, the global benchmark, rose 8% to $99.34 a barrel by 12:57 ET (16:57 GMT), having earlier hit a session high at $101.57 a barrel. Meanwhile, U.S. West Texas Intermediate crude futures climbed 8.6% to $94.77 per barrel.

"The evolving situation is keeping a significant geopolitical risk premium embedded in energy markets," Laurence Booth, global head of markets at CMC Markets, told Investing.com.

Oil tankers attacked

Heightening worries over prolonged Middle East oil supply constraints, media reports said two oil tankers were attacked near Iraq and Kuwait. Footage of the event, shared online, showed the tankers engulfed in flames, with Iraqi channels attributing the strike to Iran. 

Farhan al-Fartousi, director of Iraq’s General Company for Ports, told The Wall Street Journal that one sailor had been killed and that Iraqi rescue teams were evacuating crew members from the two vessels, which were still burning. He added that Iraq had shut all its oil ports and that fuel had spilled into the sea.

A third ship was hit by an unknown projectile near Dubai as well, the United Kingdom Maritime Trade Operations, a maritime agency, said. Separately, Oman and Iraq have reportedly closed oil terminals in the wake of the attacks.    

Reuters also reported that China had immediately banned all exports of refined fuel in March, as it moved to prevent a potential domestic fuel shortage due to the Iran conflict. The development was the latest sign of the widespread impact of the more than week-old U.S. and Israeli assault on Iran on regions far beyond the Middle East. 

Strait of Hormuz to remain closed

Aside from his comment on the Strait of Hormuz remaining closed, Khamenei said that Iran would not shy away from "avenging the blood of martyrs" of the country.

Mojtaba Khamenei is the son of former leader Ali Khamenei, who was slain at the outset of the U.S. and Israeli strikes on Iran in late February. Iranian state media said it was Khamenei’s first public statement since he replaced his father.

The Strait of Hormuz is a critical shipping choke point south of Iran that hosts a fifth of the world’s oil and liquefied natural gas supply. Container companies, keen to protect crews and struggling to find insurance, have all but halted sailings in the narrow waterway. 

Oil markets received little reprieve after the International Energy Agency (IEA) on Wednesday announced the release of record amounts of strategic oil reserves to help quell recent market ructions. Earlier in the week, Brent prices had surged as high as nearly $120 per barrel.  

IEA warns of historic disruption

The war in the Middle East is creating the largest supply disruption in the history of the global oil market, the IEA said in a report on Thursday, while slashing its annual supply outlook, shortly after the group announced its biggest-ever oil stock release.

The IEA said crude and oil product flows via the Strait of Hormuz have slowed to a "trickle" from around 20 million barrels per day before the outbreak of the war. With limited capacity available and storage filling up, key producing countries in the Gulf region have had to cut total oil output by at least 10 million barrels per day, the IEA said.

"In the absence of a rapid resumption of shipping flows, supply losses are set to increase," the agency flagged.

Globally, oil supply is now tipped to slide by 8 million barrels per day in March, with curtailments in the Middle East only partly offset by higher output from Russia, Kazakhstan and nations not in the OPEC+ producer group.

The comments come after the IEA said it would release a record 400 million barrels of oil from its strategic reserves this week. President Donald Trump has also said the U.S. will release 172 million barrels of oil from its emergency petroleum reserves. 

Separately, data released on Wednesday showed U.S. oil inventories grew a bigger-than-expected 3.8 million barrels in the prior week.

U.S. economy’s low sensitivity to energy prices

According to a report by Wells Fargo, the U.S. economy today is much less sensitive to higher energy prices than before, and the effect of spiking energy prices is more likely to show up as slower consumption growth.

As per the brokerage’s model simulations, a rise of as much as 50% in oil prices would hit the average annual growth rate of real personal consumption expenditures (PCE) by around one percentage point.

"We estimate that same 50% sustained rise in prices would have had about twice the effect back in the 1980s, lopping off around two percentage points off PCE growth. In other words, back then, talk of recession would already be gathering steam, all else equal," Wells Fargo’s Tom Porcelli said.

"The country was highly energy-sensitive then, heavily reliant on imported oil and far more exposed to sudden increases in energy costs. Higher prices translated quickly into weaker real income growth, reduced consumption and slower top-line economic activity," he said. 

According to the analyst, things are different today.

"Improvements in energy efficiency, a smaller energy footprint (relative to output) and the broader U.S. transition from being a net energy importer to a net energy exporter have together reduced the direct drag on growth and particularly consumption from oil and gas price shocks," Porcelli added.