Oil prices had another volatile start to the week before breaking out due to a combination of military escalation and diplomatic breakdown.
At the time of writing, after climbing to $116 and then flash crashing to $114, Brent Crude was trading at $116.69, up 3.66%. Meanwhile, West Texas Intermediate had risen 3.18% to $102.80.
Another weekend of escalation in the conflict started with an Iranian strike on Prince Sultan Air Base in Saudi Arabia on Saturday, wounding at least 15 U.S. service members and damaging key aerial refueling assets. The strike could hinder Saudi air defences, which heightens the risk of a successful attack on the Kingdom’s energy infrastructure.
Fears of a further disruption to oil markets then worsened as Yemen’s Houthi rebels formally entered the conflict, launching ballistic missiles toward southern Israel and signaling that the Bab el-Mandeb Strait may now be at risk.
While the Strait of Hormuz is the world’s most important oil chokepoint, the Bab el-Mandeb Strait has provided some relief for markets, with Saudi Arabia redirecting oil through its East-West Pipeline to the Red Sea. If the Houthis were to shut that in as well, the supply crisis would worsen significantly.
Over the weekend, the U.S. continued its military buildup in the region, with the arrival of the 31st Marine Expeditionary Unit, a unit that consists of 3,500 personnel and specializes in amphibious raids. This heightened concerns that the U.S. may attempt to take Kharg Island or put ‘boots on the ground’ in some other arena. Reporting from the Wall Street Journal suggests the President is considering an operation to extract Iran’s uranium.
President Trump added fuel to the fire in a Sunday interview with the Financial Times when he said his preference would be to “take the oil in Iran,” a move that would require seizing Kharg Island.
Elsewhere, Israel launched a new wave of airstrikes over the weekend targeting sites in Tehran, including a heavy-water plant and a yellowcake production facility, which resulted in partial power outages in the city.
Pakistan’s Foreign Minister Ishaq Dar said Islamabad is prepared to host talks between the U.S. and Iran, but it remains unclear how committed either side is to negotiations.
Iranian Parliament Speaker Mohammad Bagher Qalibaf dismissed the prospect of negotiations, warning that Iranian forces are prepared for American soldiers and will “set fire to their souls and punish their regional partners forever.”
That rhetoric, combined with continued strikes across the region and a U.S. troop buildup, has led markets to largely discount diplomatic progress for now.
By Josh Owens for Oilprice.com
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