Oil prices surge on Middle East tensions and Ukraine strikes

Crude oil futures climbed sharply Friday, breaking through key resistance levels as multiple geopolitical flashpoints ignited across the Middle East and Eastern Europe simultaneously. The timing couldn’t be worse for global energy markets already jittery from months of regional instability.

Brent crude futures hit a session high of $110 per barrel for the first time since May, before settling at $109.86, up 3.7% on the day. West Texas Intermediate rose 3.5% to close at $101.41 per barrel. For the week, WTI gained more than 10% while Brent advanced nearly 5%, signaling sustained upward pressure on prices.

Strait of Hormuz Under Siege

The catalyst for Friday’s rally was relentless. Iran-allied Houthi militants in Yemen fired multiple missiles toward Saudi Arabia, including one targeting the oil export terminal at Yanbu. Saudi Arabia’s military intercepted the threats, but the incident underscored how vulnerable critical infrastructure remains in the region.

Meanwhile, the Strait of Hormuz, a chokepoint through which roughly 20% of global oil passes, has become a war zone. At least nine tankers and cargo ships came under attack since Sunday as Iran pursues what amounts to an economic strangling campaign. The situation escalated when Iran sank the container ship GFS Pride on Wednesday, though the crew was safely evacuated.

These attacks have already impacted crude exports. Shipments through Hormuz stood at 9.4 million barrels per day for the week ended Wednesday, roughly 70% of pre-war averages. While not a catastrophic drop, the trend signals deteriorating conditions that could worsen quickly if tensions spiral further.

Ukraine’s Energy War Reignites

Just when markets thought they might catch a break, President Trump’s attempted “energy ceasefire” between Ukraine and Russia collapsed spectacularly. The Kremlin continued battering Ukrainian infrastructure despite the supposed truce, prompting President Zelenskyy to vow renewed strikes on Russian refineries.

Ukraine’s campaign against Russian energy infrastructure has proven devastatingly effective. Diesel prices have surged throughout 2024, hitting an average of $6.33 per gallon in the U.S. on Friday, more than 70% above the prior year. This isn’t just a headline number; it’s bleeding into consumer wallets and corporate logistics costs across every industry.

Supply Constraints Mount

The picture darkened further with news that U.S. commercial inventories declined by more than 8 million barrels for the week ended October 9. Gulf Coast production shut-ins from Hurricane Isaias created an artificial supply crunch that traders pounced on immediately.

What makes this environment particularly treacherous is the convergence of all these factors simultaneously. You don’t often see Middle Eastern drone attacks, Yemeni missile fire, a Ukrainian refinery bombing campaign, and hurricane-induced supply disruptions all happening in the same news cycle. Each individually would warrant attention; together, they’re creating perfect conditions for further price escalation.

The Real Question

The business world is pricing in not just current disruptions but the tail risk of worse outcomes. If the Strait of Hormuz faces even partial closure, or if Ukrainian strikes on Russian refineries cause cascading refinery failures across Eastern Europe, oil could easily test $120 or beyond. Diesel, already painfully expensive, would become even more scarce.

There’s also the geopolitical unpredictability factor. Iran’s calculations about how far to push the envelope remain unclear. Houthis continue firing with apparent impunity. Ukraine shows no signs of restraint. These are not stable equilibriums waiting to be resolved; they’re dynamic situations with multiple escalation paths.

The market’s reaction Friday was rational given the circumstances. What’s less certain is whether crude at $110 represents a floor or merely a way station on the road to higher prices.

Source: CNBC