Oil Market Set For Tumultuous Week As Kharg Attack Raises Stakes

Global oil markets face another week of turmoil after a US attack on Iran's main export hub heightened risks to supply across the Middle East, and deepened concerns over a conflict that's already upended global energy flows.

President Donald Trump said late on Friday that US forces had struck military targets on the vital Kharg Island and threatened to extend attacks to energy infrastructure if Tehran interferes with transit through the Strait of Hormuz — the narrow waterway connecting the Persian Gulf with the world. Iran said any such strikes would lead to retaliation against US-linked energy facilities in the region.

In the United Arab Emirates, loading operations at the key hub of Fujairah were interrupted after a drone strike in the early hours of Saturday, choking off shipments from country's only export route while the Strait of Hormuz is blocked. Activities there resumed on Sunday. 

“I don't think markets will take too kindly to the latest developments,” said Tim Waterer, chief market analyst at KCM Trade. “I expect another nervy start to the week with Kharg Island's fate unclear, given its importance to global energy supply.”

ALSO READ: No End To Iran War: Trump Says Terms Not 'Good Enough Yet' For Ceasefire

Crude benchmark Brent rallied 11% last week, hitting a high of $119.50 a barrel — back toward levels seen after Russia's invasion of Ukraine — before closing just above $103. 

“We are still hurtling down the highway at breakneck speed, in the left lane, with no sign of when we're going to be able to veer off onto the exit ramp,” said Stephen Schork, founder of Radnor, Pennsylvania-based Schork Group Inc., adding he would not be surprised to see crude open above $117 a barrel, and “we could even possibly open up above that number.”

The oil market has been been pitched into turmoil by US and Israeli attacks against Iran at the end of last month, a conflict that is hitting energy production and exports. The International Energy Agency has warned the disruption to oil supply is unprecedented, and members agreed last week to release 400 million barrels from emergency reserves to try to quell soaring prices.

Traffic through Hormuz — a vital maritime thoroughfare — has remained at a near-standstill since fighting began, with just a handful of vessels, mostly Chinese and Iranian ships, passing through. Most recently these included two India-bound vessels carrying liquefied petroleum gas and a Greek-run tanker.

President Trump intensified calls at the weekend for the choke point to reopen, saying warships will “hopefully” be sent to the area to help commercial vessels pass through. He gave little detail, beyond saying that he hoped China, France, Japan, South Korea and the UK would send ships.

Energy Secretary Chris Wright said on Thursday that the US Navy could only start escorting tankers through Hormuz by the end of this month, adding that it wasn't ready to start such operations now.

ALSO READ: Trump Calls For Countries To Send Warships To Reopen Hormuz

Highlighting the difficulties of Trump's plan, a senior Japanese official said any decision to dispatch military vessels to escort ships would face hurdles. “It is something that should be judged carefully,” ruling Liberal Democratic Party policy chief Takayuki Kobayashi told broadcaster NHK on Sunday.

With the effective closure of Hormuz shutting off exports, storage facilities in the Gulf have filled up, forcing some producers to reduce pumping. Saudi Arabia, region's heavyweight, has been ramping up flows through a pipeline across the country to its Red Sea coast, potentially allowing about 5 million barrels a day of exports.

Disruptions are rippling beyond crude, with products surging. India has started rationing gas supplies to industries, while jet-fuel costs have soared, and shortages of natural gas stand to limit fertilizer output, with poorer Asia nations bearing the brunt. In the US, retail prices of gasoline and diesel have rallied.

Kharg Island is a vital facility for Tehran as it handles most of the country's crude shipments. In announcing the strike, President Trump said military facilities there had been “obliterated”. Iran's Fars News Agency reported that exports were continuing as normal following the attack.

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