Oil prices to remain elevated as Middle East tensions are high

Tensions in the Middle East and the risk of a wider conflict will keep oil prices elevated, said Vivek Dhar, mining and energy commodities strategist at the Commonwealth Bank of Australia.

Key points:

1. Vivek Dhar, a strategist at the Commonwealth Bank of Australia, suggested that Israel might target Iran's oil supply and infrastructure, potentially impacting 3%–4% of global oil supply. He predicts
2. Brent crude will be priced between $75 and $85 per barrel in September due to decreasing chances of a Gaza truce and potential Iranian retaliation.
3. Cedric Chehab of BMI noted that recent clashes do not necessarily signal an imminent all-out war.

Oil prices climbed on Monday following a major escalation: Israel's Air Force launched strikes on Lebanon using over 100 fighter jets, prompting the Iran-backed group to retaliate with more than 320 rockets into Israel.

U.S. West Texas Intermediate crude increased by 0.75% to $75.39 per barrel, while Brent crude rose 0.67% to $79.55. Iran-backed Hezbollah claimed the strikes were in response to Israel's killing of senior commander Fuad Shukr in Beirut last month. Israel stated that its pre-emptive strikes were intended to prevent a larger attack by Hezbollah.

"While market expectations are centered on Iran's attack hurting Israel without triggering a wider regional conflict, Israel's response will be equally important. And Israel's response may include an attack on Iran's oil supply and related infrastructure, which would put at risk 3 - 4% of global oil supply," Dhar said.

Israel and Iranian conflicts

On Saturday, the chief commander of Iran's Revolutionary Guard (IRGC) suggested that a retaliatory attack on Israel could be imminent, intensifying speculation that Iran may soon avenge the killing of Hamas leader Ismail Haniyeh. While Iranian officials have strongly vowed to retaliate against Israel for Haniyeh's death, there have yet to be any significant actions or attacks despite frequent predictions of an imminent response.

Iran’s Foreign Minister has reiterated the country’s intent to retaliate for the assassination of Hamas leader Ismail Haniyeh in Tehran. Abbas Araghchi made this statement during a phone call with Italian Foreign Minister Antonio Tajani late Sunday.

Their call came after Israel and the Lebanese militant group Hezbollah, long backed by Iran, traded heavy fire early Sunday but backed off from sparking a widely feared all-out war.

Both Israel and Iranian leaders "do not want this to get out of hand and to escalate ... don't forget, Iran has a new president who's untested, and the idea is to apply pressure on Israel, but not necessarily engage in direct confrontation."

Dhar added while the escalation hurts truce talks at face value, the fact that Israel managed to thwart Hezbollah "may force Iran and its proxies to concede that Israel is in a position of power, particularly with U.S. backing, making the truce talks more palatable."

The potential for a new escalation in tensions

Chairman of the Joint Chiefs of Staff, General Brown, emphasized the importance of preventing any broader escalation and ensuring steps are taken to avoid a larger conflict. “As I talk to my counterparts, we’re discussing measures to deter escalation and prevent a broader conflict,” Brown said to Reuters before arriving in Jordan.

His regional visit, which includes Jordan, Egypt, and Israel, is crucial as the U.S. works to negotiate a ceasefire between Israel and Hamas. Al-Hadath reported Saturday that Hamas has rejected the American proposal, opposing any Israeli presence along the Philadelphia Axis and Netzarim corridor, complicating ceasefire efforts.

The ongoing conflict, now in its 11th month, has led to border clashes between Israel and Lebanon’s Hezbollah, and U.S. troops have been attacked by Iran-aligned militias in Syria, Iraq, and Jordan, further complicating the situation.

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