Oil prices surged higher Tuesday, adding to the previous session’s hefty gains, as heightened conflict in the Middle East and threats to energy flows through the Strait of Hormuz continued to underpin supply disruption worries.

At 03:25 ET (08:25 GMT), Brent Oil Futures expiring in May rose 3.7% to $80.58 per barrel and West Texas Intermediate (WTI) crude futures advanced 3.5% to $73.72 per barrel.

Both contracts closed more than 7% higher after climbing as much as 13% to one-year highs on Monday.

Strait of Hormuz closure worries support oil
The region has plunged into one of its most volatile periods in years following the weekend’s joint strike by the U.S. and Israel that killed Iran’s Supreme Leader Ayatollah Ali Khamenei.

Tensions intensified after Tehran threatened a full closure of the Strait of Hormuz, a critical chokepoint that handles roughly a fifth of global seaborne oil trade.

Iranian officials vowed to attack any ship attempting to pass through the waterway, raising the prospect of disruption to crude flows from major Gulf producers, including Saudi Arabia, Iraq, and the United Arab Emirates.

The spike in oil has been underpinned by concerns that a prolonged conflict involving the U.S., Israel, and Iran could destabilise the broader Gulf region and draw in additional actors, further threatening production and export infrastructure.

“While there are concerns about oil flows through the Strait of Hormuz, a greater risk to the market would be Iran targeting additional energy infrastructure in the region. This could lead to more prolonged outages,” ING analysts said in a note.

“While a full, long-term closure of the Strait remains an extreme scenario, even partial disruption to tanker traffic tightens market balances and could push crude prices materially higher if sustained,” said Laurence Booth, Global Head of Markets, CMC Markets. “Continued military escalation and elevated risk premia in energy markets are likely to dominate price action until there is clearer evidence of de-escalation or alternative supply routes emerge.”

Oil could top $100/barrel – OCBC
Brent prices could surge above $100 a barrel in an extreme scenario where the Strait of Hormuz faces a prolonged blockade, analysts at OCBC Bank said in a note on Tuesday, as escalating Middle East tensions roil energy markets.

Brent crude briefly jumped to around $82 per barrel on Monday amid disruptions to shipping.

OCBC warned that a sustained closure of Hormuz could send prices into triple digits. However, it expects no extended blockade in its base case, citing OPEC spare capacity as a buffer that should help cap prolonged supply damage.

Washington to mitigate higher energy costs
Despite the dramatic headlines, oil markets appear to have already priced in a substantial geopolitical risk premium ahead of the attacks and appear to be anticipating only a short-lived disruption to flows through the Strait of Hormuz, which this year’s expected supply surplus should be able to absorb.

Additionally, U.S. Secretary of State Marco Rubio said Washington would announce plans on Tuesday to help mitigate higher energy costs, signaling efforts to cushion the impact.

Still, oil remains highly sensitive to further developments, and volatility is expected to persist as the market weighs fresh geopolitical risks.
Source: Investing.com