ING analysts Warren Patterson and Ewa Manthey note that Brent has broken above $100/bbl as Middle East tensions escalate and supply risks mount. They highlight threats to flows through the Strait of Hormuz and the Red Sea, as well as disruptions to Kazakh exports. The authors argue that, without de-escalation, Oil prices are likely to move higher, with $120/bbl a potential trigger for US political pressure.

Escalating conflict underpins Brent strength

"Oil prices surged yesterday, with ICE Brent breaking above $100/bbl for the first time since May. Further escalation in the Persian Gulf and fears of a widening conflict are putting a significant amount of oil supply at risk. Houthi attacks on Saudi vessels in the Red Sea have the potential to widen this conflict, leading to further escalation."

"The potential supply disruptions facing the market now are larger than at any time during the war. Not only have oil flows through the Strait of Hormuz essentially dried up, but there are clear risks to Saudi oil flows from the Red Sea."

"In June, Saudi crude oil exports from Yanbu in the Red Sea averaged roughly 4.6m b/d. In addition, we’re seeing disruptions to Kazakh oil flows from the CPC terminal in Russia, amid alleged Ukrainian attacks on tankers. Export volumes from this terminal in recent months have exceeded 1.7m b/d."

"With little-to-no sign of de-escalation, the market is likely to take the path of least resistance for now. This suggests oil prices will only continue to move higher. The key question is at what price level pressure begins to build on the Trump administration to return to the negotiating table."

"If Trump’s previous spikes during the early stages of the war are any guide, pressure to de-escalate will likely grow significantly if, and when, Brent nears $120/bbl. For Iran, it’s less about where oil prices are trading (in fact, Iran will want to push prices as high as possible) and more about how long they can endure a collapse in oil revenues amid the US blockade."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)