Oil prices drop but on track to post a weekly gain fuelled by Israel-Iran air strikes
Oil prices fell on Friday but are on track to post a third consecutive weekly gain as air strikes between Israel and Opec member Iran stoked supply concerns in global markets.
Brent, the benchmark for two thirds of the world's oil, was down 2.66 per cent at $76.75 a barrel at 10.33am UAE time. West Texas Intermediate, the gauge that tracks US crude, was trading 0.19 per cent lower at $75 a barrel.
'Oil prices have been the primary market expression of the dynamics of the current Israel-Iran war,' Edward Bell, acting group head of research and chief economist at Emirates NBD, said.
'Oil assets, whether production sites or export infrastructure or ships, have not been directly targeted in the exchange of fire between the two countries, but markets are nevertheless pricing in security of supply concerns.'
Prices have been trading higher since the conflict broke out between Iran and Israel on June 13. Brent and WTI surged as much as 13 per cent in the first few hours of trading after the conflict began due to supply-related concerns. They settled around 8 per cent higher on the first day.
Iran is the third-biggest producer of oil among the Opec group, with a total production of 3.3 million barrels per day.
Concerns have also grown that the Strait of Hormuz, a key sea passage in the Arabian Gulf that helps oil tankers transport about 20 million barrels of oil and refined products every day, would be shut by Iran.
US President Donald Trump said he will decide 'in the next two weeks' whether his country will join Israel's war on Iran, White House press secretary Karoline Leavitt said on Thursday.
If the US joins the conflict, it is expected to further stoke tensions in the region and affect oil markets.
'Oil markets are accustomed to geopolitical risk and there is slack available in the market to absorb at least some of the anxiety over supply security,' Mr Bell said. He added that spare capacity within Opec+ is estimated at around 5 million barrels per day, 'though with the caveat that much of that capacity is reliant on access to the Strait of Hormuz to make it out to seaborne markets'.
Spare capacity is the volume of production that can be brought on within 30 days and sustained for at least three months.
Mr Bell also added there had been no material interruption to shipping in the Gulf region and oil continued to be exported from key market, including the UAE.
"We're starting to hear impressive forecasts – as is always the case in escalation markets, with some pointing to a potential jump in crude prices to the $130–$150 per barrel range if Iran were to block oil and gas flows through the Strait of Hormuz, where 20 per cent of global supply transits," said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.
Citigroup analysts expect oil to spike to about $90 per barrel if the Strait of Hormuz is closed. However, a prolonged halt to shipping through the crucial waterway would be unlikely, Bloomberg reported, citing Citigroup analysts Anthony Yuen and Eric Lee.
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