Oil prices shot past US$100 a barrel on Wednesday as fighting between the US and Iran escalated, threatening to increase costs for consumers and businesses worldwide.
Brent crude, the international standard, climbed into triple digits for the first time since July and settled at US$101.21 a barrel. US benchmark crude was close behind, finishing at US$96.05 a barrel a day after attacks on oil facilities and ships in the Middle East raised the risk of further disruptions to global supplies already constrained by war.
New developments in the Middle East, prospects of both peace and renewed hostilities, have caused market whiplash throughout the conflict’s more than six months. Oil returning to the US$100 mark raises concern because experts have warned that a prolonged period of steep prices would worsen the economic fallout.
Crude is the main ingredient of widely used fuels like gasolene and diesel, both of which have become more expensive in recent weeks. Higher energy prices ripple through the global economy, adding to the cost of everything from producing and transporting food, medicines and household goods to daily commutes and air travel.
“Brent breaking above US$100 is a major psychological milestone for markets, but the bigger concern is what this means for inflation,” Lukman Otunuga, market research head at global broker FXTM, noted.
Political ramifications could pile up in the meantime. US President Donald Trump, who has repeatedly tried to downplay the war he co-launched, said on Wednesday that oil prices won’t likely come down until after November’s mid-term elections.
What’s driving the latest surge in oil prices
Crude oil prices shot up shortly after Israel and the US began their war with Iran in late February. The fighting halted most shipping through the Strait of Hormuz, a narrow waterway where roughly a fifth of the world’s oil supply passed before the conflict.
Prices have fluctuated considerably over the last six months. Brent surged in the early days of the war and briefly reached nearly US$120 a barrel. Prices sometimes swung widely day by day, but the benchmark stood above US$100 for a full month in the spring.
Hopes for a lasting peace agreement and a plan to move oil safely out of the Persian Gulf caused the market to cool in the early summer, when prices fell closer to pre-war levels of around US$70 a barrel. Instead, new attacks mounted, talks between the US and Iran crumbled and oil went up again, albeit with some volatility.
Before Wednesday, Brent last settled above US$100 on one day in July but had not dropped below US$90 since the end of August.
Oil prices rose further on Tuesday as hostilities intensified around the Persian Gulf, with US forces destroying five Iranian oil tankers and an Iranian-backed Houthi rebel group striking oil facilities in Saudi Arabia.
Recent attacks by Yemen’s Houthis could constrain global oil supplies even more because they targeted an alternative shipping route that Saudi Arabia has relied on to transport oil during the war.
Renewed pain at the pump and other costs for consumers
One of the most immediate consequences of higher oil prices is the cost of fuel. Drivers see and feel the impact when they fill up their tanks. More expensive diesel, jet fuel and bunker fuel add to transportation costs for goods hauled on trucks, trains, airplanes and ships.
The effects have reached consumers, businesses and national economies in much of the world. Countries in Asia and Africa that rely more heavily on imports from the Middle East have experienced some of the starkest shocks over the course of the war.
In Nigeria, diesel prices are more than 90 per cent higher and gasolene prices are up nearly 58 per cent, according to the latest data from energy tracker Global Petrol Prices. Countries including Indonesia (diesel up 87 per cent and gas up 38 per cent) and Lebanon (diesel up 80 per cent and gas up 46 per cent) have also seen steep spikes.
In the US, the average price for a gallon of regular gasolene rose to US$4.22 on Wednesday, nearly 42 per cent more than the national average of US$2.98 before the war began, according to motor club AAA. Meanwhile, American diesel keeps setting new records; the average price for a gallon on Wednesday hit US$5.94, another all-time high without accounting for inflation and a 58 per cent increase from the start of the war.
The cost of diesel can have an outsize impact because the fuel powers long-haul trucks and farm equipment. Shoppers may see transportation and production costs show up on supermarket shelves, particularly for perishable products that need to be restocked frequently. Tractor-trailers that move parcels between distribution hubs also run on diesel, and some costs have been passed on to consumers in the form of added fees for online orders and mailed packages.
Many airlines have cut flights while raising fares and fees in response to rising jet fuel prices. More expensive oil could drive up costs for a long list of petroleum-derived products, including things made with rubber and clothes made with synthetic fabrics.
The Strait of Hormuz also is a major route for liquefied natural gas, a key ingredient in the production of nitrogen fertiliser. With gas supplies constrained like oil, the United Nations has said the war could reduce agricultural yields and increase world hunger.
What US$100 a barrel could mean for the road ahead
It can take time for all energy shocks to trickle through the supply chain — meaning that squeezes even from earlier in the war could carry impacts that still haven’t been fully realised yet. And the return of US$100 Brent may only add to those costs.
Otunuga, of FXTM, noted on Wednesday that a big question boils down to how long prices stay elevated.
“This time feels different,” Otunuga wrote, pointing to rising tensions. He added that a solid close above US$100 “confirms this isn’t just a headline spike” and potentially opens the door toward US$110 — although there’s still the possibility for momentum to fade.
Analysts at Bank of America also said this week that additional refinery outages in Russia, reduced refining activity elsewhere, and sharply declining inventories have pushed diesel and gasolene prices sharply higher globally.
They increased their oil price forecast for the second half of the year to US$83 a barrel “in light of more persistent disruptions to Hormuz”, but said they still expected shipping through the strait to gradually pick up. If attacks keep a chokehold on traffic, prices could reach US$95 to US$120 a barrel, while damage to major energy infrastructure could produce spikes of up to US$150 a barrel, the analysts wrote.
The prospect of reaching a durable deal before the US mid-terms looks “increasingly unlikely” and “could remain elusive even beyond that”, the analysts added. The upcoming elections are now just 8 weeks away.
Steep energy costs heading into November could prove particularly challenging for Trump’s Republican Party, with many voters already sour on his management of the economy. Trump himself said on Wednesday that he didn’t think oil prices would cool before the mid-terms — but would come down “right after”.
AP
