Oil briefly surpassed $126 a barrel Thursday, its highest price in four years, as some traders worried about an escalation in the US-Iran war.
Brent crude, the global benchmark, surged overnight to touch $126.41 a barrel, before falling 1.5% to $116.3 a barrel, as trading volumes thinned. WTI crude, the US benchmark, was broadly flat at $106.7 a barrel.
US average gasoline prices hit a four-year high of $4.30 a gallon on Thursday, according to the latest national average reading from the AAA.
“The main catalyst for the latest jump in oil prices was a report from Axios, suggesting that an escalation in the conflict was still being considered as an option,” Deutsche Bank analysts wrote in a note.
Thursday’s price spike was also driven by quirks in oil futures contracts, according to Neil Wilson, a strategist at investment bank Saxo. The widely quoted June futures contract expires today and so trading volume has shifted to the July contract, which was trading above $110 a barrel.
Global crude prices have risen for eight straight days, as face-to-face negotiations between the United States and Iran to end the war stalled, keeping the Strait of Hormuz – a critical oil and natural gas shipping channel – effectively shut.
“The oil market has moved from… hoping for resolution to fixating squarely on the physical scarcity and long-term threat to supply with the possible escalation of conflict now looming,” Wilson wrote in a note.
Last night, Trump said he wanted the US naval blockade of Iranian ports to continue, sources familiar with the talks with his senior advisers told CNN. US officials have begun laying the groundwork for such an extension, including a longer-term closure of the Strait of Hormuz.
Mohsen Rezaei, a top military adviser to Iran’s supreme leader, warned that if the US blockade continues, “Iran will respond,” according to state media.
The possibility of further military action in the Middle East has put traders on alert, said Janiv Shah, vice president of oil markets at Rystad Energy.
“Further escalation and any attacks on energy infrastructure could force (oil price) benchmarks to gain rapidly,” Shah said. Higher oil prices could accelerate a sustained decline in global oil demand, elements of which were already visible, he added.
Daily oil tanker transits through the Strait of Hormuz have plunged to single digits since the war began in late February, resulting in what the International Energy Agency called the “largest supply disruption in history.”
