Oil Prices Hit Six-Week High as Middle East Conflict Deepens Supply Shock Fears

NEW YORK — Oil prices climbed to their highest levels in roughly six weeks as the escalating conflict between the United States and Iran intensified fears that disruptions to Middle Eastern energy supplies could become longer and more severe.

Brent crude rose to around US$97.49 a barrel on Tuesday, while U.S. West Texas Intermediate crude reached about US$92.92, extending a rally driven by growing concerns over oil shipments through the Persian Gulf and the strategically vital Strait of Hormuz.

The latest jump comes as Iran threatens retaliation against regional energy infrastructure following U.S. strikes, raising concerns that the conflict could move beyond military targets and increasingly affect the global oil market.

Iran threatens wider energy retaliation

Oil traders are closely watching Iran's warnings that regional energy infrastructure could become a target.

The latest escalation follows U.S. attacks near Iran's major oil-export infrastructure around Kharg Island, an important hub for Iranian crude shipments. Tehran has threatened further retaliation, increasing fears that energy facilities, tankers and shipping routes could face additional attacks.

Any sustained disruption could have consequences well beyond the Middle East because the Persian Gulf is one of the world's most important sources of crude oil and refined petroleum products.

The Strait of Hormuz is particularly important. A large share of global seaborne oil exports normally passes through the narrow waterway connecting the Persian Gulf with the Gulf of Oman.

Shipping through Hormuz has already slowed

Traffic through the Strait of Hormuz has fallen significantly amid the conflict and threats against commercial shipping.

Reuters reported that Middle Eastern oil shipments had fallen from roughly 18 million barrels a day to about 11 million barrels a day, although several million barrels are still moving through the waterway.

That means the market is facing a serious disruption, but not yet a complete shutdown.

Oil producers and traders are also using alternative routes where possible. Saudi Arabia and Iraq, for example, have been able to move some crude through alternative infrastructure, including routes toward the Red Sea.

The continued flow has helped prevent prices from breaking decisively above US$100, but analysts warn that the situation could change rapidly if attacks intensify.

Why oil has not yet crossed US$100

Despite the disruption, Brent has remained below the psychologically important US$100-a-barrel threshold.

One reason is that some oil continues to pass through Hormuz, while producers outside the region are expected to increase output.

Reuters reported that non-OPEC producers including the United States, Canada and Guyana are expected to add around 1.4 million barrels per day of production, helping offset part of the Middle Eastern shortfall.

Demand concerns are also limiting the price surge. Higher prices can encourage consumers and businesses to reduce fuel use, while countries with large inventories can temporarily draw on stored supplies.

But those buffers have limits.

If shipping disruptions persist for months, the market could face a much tighter supply balance.

Markets are beginning to price in a longer conflict

The biggest concern for traders is no longer simply whether another attack will occur, but whether the conflict could become a prolonged disruption to energy supplies.

Oil prices have already posted a substantial weekly gain. Brent climbed 7.6% during the week ending Sept. 4, while U.S. crude rose nearly 10% as Middle Eastern supply routes remained impaired.

Analysts have warned that a prolonged disruption could keep crude prices elevated well into 2027.

DBS and ANZ analysts have highlighted the possibility of longer-lasting effects on supply, while Goldman Sachs has also revised its outlook amid the deteriorating situation.

That does not mean oil is certain to surge dramatically. Prices could fall quickly if fighting eases and shipping through Hormuz returns to normal.

For now, however, the risk premium remains firmly embedded in crude prices.

Higher oil means wider inflation risks

A sustained increase in crude prices could affect far more than petrol stations.

Oil is a fundamental input for transportation, manufacturing, agriculture and the production of numerous goods. Higher crude prices can therefore feed into gasoline, diesel, aviation fuel and other energy costs.

That can make it harder for central banks to bring inflation down.

The recent oil rally has already been accompanied by a sharp increase in U.S. diesel prices. Reuters reported that average U.S. diesel prices reached a record level during the week ending Sept. 4.

Higher fuel costs can also increase shipping and trucking expenses, potentially pushing up the prices of food and consumer goods.

Airlines, shipping companies and consumers face the pressure

The aviation and shipping sectors are particularly exposed.

Airlines must contend with jet-fuel costs, while shipping companies face both higher bunker-fuel prices and increased insurance and security costs when vessels operate near conflict zones.

For consumers, the impact could eventually appear through higher prices at fuel stations.

The extent of the increase will vary from country to country depending on local fuel taxes, government subsidies, exchange rates and how quickly higher international crude prices are passed through to consumers.

Oil producers are also facing a difficult balancing act

The crisis creates conflicting incentives for major oil producers.

Higher prices can generate additional revenue for exporting countries, but a prolonged disruption also threatens global economic growth and could weaken demand.

OPEC+ has so far maintained its broader output policy while the market watches developments in the Middle East.

Producers also have to consider how much spare capacity can actually be brought to market quickly enough to compensate for disrupted supplies.

Meanwhile, the United States and other non-OPEC producers could play a larger role if prices remain elevated.

The critical question is what happens next

The oil market is now watching several developments simultaneously: Iranian retaliation, attacks on energy infrastructure, commercial shipping through the Strait of Hormuz, alternative export routes and any diplomatic effort to contain the conflict.

A return to stable shipping could quickly remove part of the geopolitical premium currently built into crude prices.

But another major attack on oil facilities or a further reduction in Hormuz traffic could push prices significantly higher.

Some analysts have warned that oil could reach US$120 a barrel if attacks on shipping intensify. That remains a scenario rather than a forecast of what will definitely happen.

For now, crude remains just below US$100, but the market is sending a clear warning: the longer the conflict disrupts the world's most important oil-export region, the greater the risk that today's energy shock becomes tomorrow's inflation problem.

WWC ONE MEDIA J.M.D