Crude oil prices increased by almost 3 per cent on Thursday as conflict between Israel and Iran escalated and uncertainty about potential US involvement kept investors on edge.
Brent crude futures gained $2.15 or 2.8 per cent during the session to $78.85 a barrel and the US West Texas Intermediate (WTI) crude futures went up by $2.06 or 2.7 per cent to $77.20 per barrel.
Israel bombed nuclear targets in Iran on Thursday, and Iran fired missiles and drones at Israel after hitting an Israeli hospital overnight.
The White House said on Thursday that President Donald Trump would decide whether America will get involved in the Israel-Iran conflict in the next two weeks.
However, the Wall Street Journal reported that Mr Trump has approved US attack plans for Iran, but is withholding giving the final go-ahead to see if Iran abandons its nuclear ambitions.
Analysts noted that Iran’s key Fordo enrichment facility is buried deep underground and only the US holds the deep-penetration bombs required to hit it but the American President has been weighing whether such a strike would work.
As he deliberates on the next step, the conflict continues to escalate with Israel’s defense minister saying Iran’s supreme leader, Mr Ayatollah Khamenei, can “no longer be allowed to exist,” after an Israeli hospital was hit by Iranian strikes Thursday.
Meanwhile, concerns are rising that the growing hostilities are likely to significantly affect the global economy, and by extension, oil prices.
Iran is the third-largest oil producer in the Organisation of the Petroleum Exporting Countries (OPEC), extracting about 3.3 million barrels per day of crude oil, meaning attacks could see production halted.
There is also the possible blockage of the Strait of Hormuz along Iran’s southern coast which sees about 18 million to 21 million barrels per day of oil and oil products move through there. This could largely disrupt trade flows.
JP Morgan said an extreme scenario, in which the conflict widens to the broader region and includes a Strait of Hormuz closure, could result in oil prices surging to $120 to $130 per barrel.
Goldman Sachs said on Wednesday that a geopolitical risk premium of about $10 a barrel is justified, given lower Iranian supply and risk of wider disruption that could push Brent crude above $90.
However, if the conflict recedes, the war premium will deflate and prices will likely cycle lower to around $60.