Oil Spike Fades as Traders Await Iran’s Response to US Attack

Oil erased earlier gains as fears began to fade of an immediate disruption to supplies from the Middle East, following US strikes on key Iranian nuclear sites, Bloomberg reported.

Global benchmark Brent initially surged as much as 5.7% to $81.40 a barrel in heavy trading, but later dropped below $77. US President Donald Trump said that weekend air attacks had “obliterated” a trio of targets in Iran, and threatened more military action if the country didn’t make peace. In reply, Tehran warned that the strikes would trigger “everlasting consequences.”

The oil market has been gripped by an escalating crisis since Israel attacked Iran more than a week ago, with crude benchmarks pushing higher, options volumes spiking, and the futures curve shifting to reflect fears of a near-term interruption to supplies. The Middle East accounts for about a third of global crude production, but there haven’t yet been any signs of disruption to physical oil flows, including for cargoes going through the Strait of Hormuz chokepoint.

“We are up $10 a barrel since the war started, now a little more, and so I think there is an appropriate amount of risk in the market,” said Bob McNally, founder of Rapidan Energy Advisers LLC and a former White House energy official.

“Traders are holding their breath, waiting to see if Israel or Iran expand this conflict beyond military and political targets into traded energy,” he told Bloomberg Television. “So far, no one has pulled that trigger — and if they don’t, I can see the price reversing.”

The unprecedented US strikes were meant to hobble Iran’s nuclear program, and targeted sites at Fordow, Natanz, and Isfahan. At the United Nations on Sunday, Tehran’s Ambassador Amir Saeid Iravani said the “timing, nature and scale” of its response “will be decided by its armed forces.”

There are multiple, overlapping risks for crude flows. The biggest centers on the Strait of Hormuz, should Tehran seek to retaliate by attempting to close the narrow conduit. About a fifth of the world’s crude output passes through the waterway at the entrance to the Arabian Gulf.

Iran’s parliament has called for the closure of the strait, according to state-run TV. Such a move, however, could not proceed without the approval of Supreme Leader Ayatollah Ali Khamenei. Authorities may yet restrict flows in other ways.

“The market will closely watch Iran’s response,” said Muyu Xu, a senior crude analyst at Kpler Ltd. “If Iran blocks the Strait of Hormuz, even for one day, oil can temporarily hit $120 or even $150.”

The crisis will also throw a spotlight onto the Organization of the Petroleum Exporting Countries, and its allies including Russia. In recent months, OPEC+ eased supply curbs at a rapid clip to regain market share, and yet members still have substantial idled capacity that could be reactivated.

Brent’s prompt spread — the difference between its two nearest contracts, and a closely followed metric — first widened to as much as $1.99 a barrel in backwardation, from $1.53 on Friday. It then retraced almost all of that move.

“It may take a few days or even weeks to discern the Iranian response to this unprecedented attack,” RBC Capital Markets LLC analysts including Helima Croft said in a note. “Above all, we would caution against the knee jerk ‘the worst is behind us’ hot-take at this stage.”