Oil prices increased by more than 2% on Wednesday, building on the significant gains from the prior session, as concerns about potential supply disruptions intensified following overnight strikes exchanged between the US and Iran. The escalation has diminished expectations for a swift alleviation of tensions in the Middle East. The United States announced that it executed a series of airstrikes targeting locations in Iran overnight, prompting a reaction from Tehran. This development has been characterised as the most significant escalation in the ongoing conflict between the two nations in recent weeks. Brent crude futures increased by 99 cents, or 2%, reaching $96.54 per barrel, whereas US West Texas Intermediate crude futures climbed $1.55, or 1.52%, to $92. Both contracts experienced an increase exceeding $4 on Tuesday, with Brent recording its most significant rise since July 24 and WTI its largest since July 23.

The US Central Command indicated that the strikes were a response to recent attempted assaults by Iran’s Islamic Revolutionary Guard Corps targeting commercial shipping in the Strait of Hormuz and American service members stationed in the area. The IRGC stated that the US attacks would impose additional limitations on traffic through the Strait of Hormuz, a crucial waterway responsible for approximately one-fifth of global oil consumption prior to the conflict, which Iran has effectively shut down to commercial shipping. The IRGC reported that it had aimed ballistic missiles at a US military installation in Jordan, asserting that a significant number of US personnel were killed in the attack. Iranian state media reported a significant drone attack targeting a US base in Bahrain, which was characterised as a reaction to the American strikes.

The most recent exchange occurred following a weekend escalation in hostilities, marking the first such incident since July, and was preceded by assaults on two tankers departing the Strait of Hormuz on Monday. The attacks contributed to disruptions in oil supplies and prompted traders to seek alternative crude shipments. Jordan’s military reported that its air defences successfully intercepted 10 out of 13 ballistic missiles that penetrated its airspace. Meanwhile, two US officials indicated that there have been no reported American casualties to date. Kuwait has indicated that its armed forces are taking action in response to hostile drone activity. The duration of the disruption will be a critical determinant for crude markets. JPMorgan projects that every extra month of disruption may increase Brent prices by approximately $7 to $8 per barrel. If the disruption persists for three months, the bank anticipates average monthly Brent prices to approach approximately $114 per barrel.

Goldman Sachs has issued a cautionary note indicating that Brent may escalate to $120 a barrel should shipping disruptions persist through the Strait of Hormuz, which is recognised as the most critical oil transit route globally. Its base case, however, posits that tensions in the Middle East will ultimately subside. The bank anticipates that Brent will average $80 a barrel in the fourth quarter and $75 a barrel in the following year, while highlighting that risks are tilted toward the upside should disruptions in the Strait of Hormuz and the Red Sea continue for an extended period beyond expectations. Ponmudi R stated that crude prices would remain closely tied to developments surrounding the Strait of Hormuz. He stated that a sustained recovery in shipping flows could further unwind the geopolitical premium in crude and provide relief to emerging-market equities, while renewed disruptions could quickly reverse that trend.