Oil prices increased by over 2%, beginning June on a subdued note, following Israel’s directive for troops to penetrate further into Lebanon amid its ongoing conflict with the Iranian-backed Hezbollah group, notwithstanding a ceasefire declared more than six weeks prior. The escalation in hostilities occurred shortly after the United States facilitated peace talks between Israel and Lebanon in Washington on Friday. The renewed fighting has diminished expectations that the U.S. and Iran might soon reach an agreement to extend their ceasefire arrangement. U.S. crude futures increased by $2.37, representing a rise of 2.71%, reaching $89.73 a barrel. Meanwhile, Brent crude futures rose by $2.16, or 2.37%, to $93.28 a barrel. Last week, Brent crude experienced a decline of approximately 11%, representing its most significant weekly decrease in seven weeks. Meanwhile, U.S. West Texas Intermediate saw a reduction of over 9%, marking its largest weekly drop in six weeks. Both benchmarks reached their lowest points since mid-April.

The Israel-Lebanon conflict has emerged as the most notable consequence of the Iran war. The confrontation commenced on March 2, when Hezbollah initiated the launch of rockets and drones into Israel, aligning with its ally, Iran. Despite a mutual agreement to a ceasefire in mid-April, hostilities have persisted. U.S. President Donald Trump stated on Friday that he would soon make a decision regarding a proposed agreement to extend the ceasefire with Iran, which was initially announced in early April. The extension would provide negotiators with further time to seek a durable resolution to the conflict and tackle the protracted disagreement regarding Iran’s nuclear programme. Israel’s involvement is essential to any accord, whereas Iran has consistently maintained that Hezbollah’s inclusion in the negotiations is imperative. Analysts observed that even in the event of a deal being finalised, a swift escalation in oil supply remains improbable. The Strait of Hormuz, responsible for approximately one-fifth of global oil and gas flows, has effectively remained closed since the onset of the conflict marked by U.S. and Israeli strikes in February.

The three-month confrontation involving the U.S. and Iran has consistently generated optimism regarding a potential breakthrough that may facilitate the reopening of the Strait of Hormuz. While officials on both sides have indicated that an agreement may be attainable, discrepancies persist regarding the specifics of any prospective arrangement. Market observers indicated that even if a ceasefire is finalised, it may take months for shipping operations through the Strait of Hormuz to normalise. Any compromised energy infrastructure may necessitate an extended duration before achieving full operational capacity. Earlier this month, Saudi Aramco Chief Executive Officer Amin Nasser cautioned that disruptions in the Strait of Hormuz could postpone stability in global oil markets until 2027. He posits that ongoing disruptions may impact nearly 100 million barrels of oil supply on a weekly basis.

Saudi Aramco stands as the preeminent oil producer globally. Morgan Stanley characterised the present oil market as being in “a race against time”, indicating that the elements which have thus far constrained a more significant increase in crude prices could start to diminish if the Strait of Hormuz remains closed through June. The broking indicated that heightened U.S. crude exports and diminished demand from China have contributed to mitigating a portion of the supply shock thus far. However, it cautioned that a prolonged closure of the strait could once again tighten global supplies if disruptions persist beyond the capacity that the U.S. and China can effectively mitigate.