This timeline charts oil prices reacting to Israel-Iran attacks so far. What comes next?

By Myra P. Saefong

Mideast in 'a new and dangerous phase of mutual antagonism,' but oil may be priced for peace

There was a time when violence in the Middle East led to big spikes in oil prices, but that's not what's happened despite the volley of attacks between Israel and Iran that threaten to plunge the oil-rich region into further turmoil.

On Friday, global benchmark Brent crude futures (BRN00) (BRNM24) briefly spiked overnight but pared much of those gains to settle at $87.29, up just 18 cents, or 0.2%, for the session.

"The Iran-Israel conflict has not impacted the flow of oil in the Middle East, which is why oil price reactions to the recent military escalation have been relatively muted," said Jim Burkhard, vice president and head of research for oil markets, energy and mobility, at S&P Global Commodity Insights, in emailed commentary.

Still, "with no sign that hostilities will de-escalate, direct attacks by Iran and Israel are in a new and dangerous phase of mutual antagonism that could yet spillover into the oil market," he said.

Oil briefly touches $92 a barrel

Front-month global benchmark Brent crude futures are actually trading a bit lower than they where on April 1, when an attack on an Iranian consulate in Damascus, Syria was blamed on Israel, which killed two Iranian generals and five officers.

Prices for global benchmark Brent crude on April 2 had posted a gain of as much as 2.2% on April, a Dow Jones Market Data analysis of FactSet data show, with prices topping out at more than five-month high above $91 a barrel after posting four consecutive session gains through April 5.

Tensions were high after the attack on Iran's consulate in Damascus, with Brent crude touching an intraday high on April 12 at $92.18, the highest since October, just ahead of the Iran's drone and missile attack on Israel on April 13. Iran launched more than 300 drones and missiles toward Israel that day, with U.S. officials claiming that the vast majority shot down by Israeli, American and other allied forces before reaching Israeli territory.

Oil markets had "grown accustomed to volatility," Regina Mayor, global head of client and markets at KPMG, told MarketWatch for a story on April 15.

The world then waited for Israel's response, which came on April 19, when Israel reportedly launched what news reports referred to as a "limited" strike on central Iran, near a city where Iran has nuclear facilities and an air base. The Wall Street Journal reported that Iranian state television repeatedly played down the episode in its broadcasts, saying three small flying objects had been downed by air-defense systems.

Prices for Brent oil spiked by more than 4% to hit an intraday high on Friday near $91 a barrel before ending the session with a modest 0.2% climb. As of Friday's settlement, they're trading down 0.2% for the week.

"Any notable damage to physical oil supply or any disruption to major trade routes could send oil prices surging," said KPMG U.S. Energy Leader Angie Gildea, in emailed commentary Friday. "Outside of that, we will continue to see volatility, but I don't see us getting into triple-digit [oil price] situation."

Brent oil futures haven't traded at $100 or higher since August 2022. Early that year, Russia invaded Ukraine raising concerns over global supplies of oil.

The Russia-Ukraine war has shown the "all the missiles in the world may kill people, but they don't kill oil production," said Manish Raj, managing director at Velandera Energy Partners, adding that despite widespread air attacks in that war, oil production has remained robust.

Oil may be priced for peace

There are a number of potential scenarios that are now in play as the Israel-Iran developments unfold.

One scenario would see continued "air action" between the two nations, with "no feet on the ground," given that the countries are over a thousand miles apart, would not likely cause disruptions to oil output, said Raj at Velandera. "Air attacks such as drones or missiles do not cause disruption to oil production, given wells are geographically spread out," he said. The U.S. would also strongly discourage attacks against oil facilities so Israel would not likely target oil facilities, he said.

Meanwhile, another scenario would be an "all-out regional war" would be "chaotic," he said, "since Iran would have all the motivation to block the Strait of Hormuz, effectively putting a chokehold on global oil supply."

The Strait of Hormuz, a sea passage between the Persian Gulf and the Gulf of Oman, is considered the world's most important oil-transit chokepoint. Some oil experts, however, have said that Iran isn't likely to block the waterway.

Such a move would not be in Iran's best interest, given that the strait is the "lung of Iran," said Anas Alhajji, an independent energy expert and managing partner at Energy Outlook Advisors, told MarketWatch. Iran it exports its own oil through the waterway.

Still, Raj pointed out that Iran has "many sympathizers in the Arab world due to its support of Gaza -such that it can seek helping hands from Iraq, Syria, Lebanon and many others," he said, suggesting that the conflict could certainly expand and worsen.

"If Iran is pushed to the corner, it will unleash damages to regional oil production," he said.

The most likely Israel-Iran outcome scenario, however, is most likely one of "peace" - in which both Israel and Iran embrace a peaceful end to the escalations, said Raj.

"We expect both parties will engage in skirmishes and posturing as face-saving measures, but neither party actually wants a war," he said.

'We expect both parties will engage in skirmishes and posturing as face-saving measures, but neither party actually wants a war.'Manish Raj, Velandera Energy

Since the flow of oil won't stop when conflicts unwind, prices have no reason to climb, and they've already "unwound the gains that had been built-up in anticipation of escalations," said Raj.

All told, "recent events have certainly created more uncertainty regarding the potential for conflict to impact market valuations," said Kathryn Kaminski, chief research strategist at investment management firm AlphaSimplex.

"If the conflict escalates it would put further pressure on oil prices, which is definitely a concern for investors because higher oil prices will not be a positive for the goal to reduce inflation to target," Kaminski told MarketWatch.

On whether oil prices can still top $100, Kaminski emphasized that oil is a very volatile commodity that has experienced big swings in the past. "Given the current set of scenarios which still remain unclear, it could certainly move above $100."

-Myra P. Saefong

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04-20-24 0745ET

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