Oil price rise comes at a critical point

Recently, the price of oil has surged by 5% following comments made by US President Joe Biden regarding potential military actions by Israel against Iran's oil sector. When questioned about whether he would support Israel in targeting Iran's oil facilities, Biden responded, 'We’re discussing that. ' Iran holds a significant position in the global oil market, ranking as the seventh largest oil producer worldwide. The country exports nearly half of its oil production, with China being its primary customer. The situation escalated after Iran launched missile attacks on Israel on Monday, which led to a 10% increase in the price of Brent crude oil, bringing it to $77 a barrel. Despite this rise, the current price remains lower than the peaks observed earlier this year. A sustained increase in oil prices could result in higher petrol costs and increased gas and electricity bills, contributing to a rise in inflation rates. Up until now, weaker demand from China, coupled with a robust supply from Saudi Arabia, has helped to keep oil prices relatively stable. The response from oil markets has been notably less intense compared to the reactions seen during Russia's invasion of Ukraine in 2022. However, the recent escalation of violence in the Middle East and the looming threat of further military actions are now casting a shadow over the markets. A significant concern is whether any conflict could obstruct the Straits of Hormuz, a vital passageway through which approximately one-third of global oil tanker traffic and one-fifth of liquefied natural gas (LNG) shipments must navigate. Since the onset of the war in Ukraine, the world has become increasingly reliant on LNG tankers for frozen gas supplies. While Asia is the region most dependent on the flow of oil and gas from the Persian Gulf, any disruptions in this area would have immediate and substantial effects on global prices. President Biden has acknowledged the 'very serious' potential impact of these developments and is monitoring the situation 'extremely closely. ' This situation arises at a time when central bankers worldwide believed they had achieved a quiet victory over the inflationary pressures that emerged during the pandemic and the Ukraine conflict. This context may help explain why leaders from the G7 nations are attempting to temper the anticipated response from Israel to Iran's provocations.