Middle East: Why Israel's attacks make oil and gas more expensive

The Israeli attack on Iranian nuclear facilities has triggered a sharp rise in the price of crude oil. On Friday night, the price of the benchmark Brent crude climbed by almost $10 per barrel (159 liters) to around $78. The last time comparable sharp upward spikes occurred was in early March 2022 in response to the Russian attack on Ukraine.

Over the course of the day, the Brent crude price fluctuated between $74 and $75, still representing a gain of more than 7 percent. Stock prices declined worldwide on Friday. Gold and government bonds also rose in price – this is the typical reaction of financial market players in such crisis situations. There's always talk of a flight to safe havens.

The fact that crude oil saw the comparatively sharpest spike is due to possible immediate consequences that traders are trying to anticipate – namely, a shortage of the world's most important commodity. This is partly due to the fact that Iran (despite US sanctions) is one of the major oil producers, with China being the main supplier. However, the country of the mullah regime only covers about three percent of global demand.

Much more importantly: “There is concern that the conflict will escalate and lead to disruptions in oil supplies, since a third of the world’s oil supply comes from the Middle East,” write Carsten Fritsch and Barbara Lambrecht, commodity experts at Commerzbank, in an analysis.

Iran has already announced harsh retaliatory measures. He continued: "The question is whether these will be limited to Israel or also include other targets in the region. A possible blockade of the Strait of Hormuz is also a risk factor."

This is the strait between Iran and the Horn of Africa. Ships with a total capacity equivalent to about one-fifth of the global oil market pass through this passage every day, loaded with crude oil, fuels, and oil condensates.

The effects of the Israeli attack are also making themselves felt in natural gas. On the TTF, the leading trading platform for Europe, prices climbed to more than €38.50 per megawatt hour, the highest level since the beginning of April – on Tuesday, they were about €4 lower.

The oil and gas markets are closely linked because production and use are similar in many cases. And for both, the Israeli attack has massively intensified an already rising trend of recent days.

A factor in the highly volatile substance is that the EU now wants to quickly become less dependent on Russian gas, which increases the price pressure on methane from other countries. Traders are also betting that natural gas will be increasingly needed for electricity generation in Europe in the coming weeks, as French nuclear power plants are threatened with shutdown due to corrosion damage.

Furthermore, there are initial signs of an economic recovery, which would mean rising demand for fossil fuels. Motorists in this country have already felt this in the form of rising fuel prices.

According to the ADAC, the average price has already risen by almost one cent to €1.55 within a week. Further short-term increases are now inevitable, as gas station prices generally follow crude oil prices every three to four days.

And in the longer term? "The increased uncertainty suggests a higher risk premium on the oil price, which is why it is unlikely to fall sustainably below the $70 mark for the time being," write Fritsch and Lambrecht. For an additional increase, the conflict would have to escalate further.

If this happens, it would also have a significant impact on local inflation. In recent months, price reductions in energy products have been a guarantee for a decline in inflation. On Friday, the Federal Statistical Office reported a final rate of 2.1 percent for May compared to the same month last year, which is only just above the European Central Bank's (ECB) target. This was partly due to fuels being 6.8 percent cheaper than a year earlier. Heating oil even recorded a decline of 9.5 percent.

The behavior of US President Donald Trump is likely to be extremely important for future developments. On Friday, he called on the Iranian leadership to relent on its nuclear program. "Iran must make a deal before there's nothing left," Trump wrote on his Truth Social platform.

Several analysts, such as Helima Croft of the Royal Bank of Canada, believe that the president will now ask the oil cartel OPEC to increase production “in order to keep prices under control and protect US consumers from the economic impact of the conflict in the Middle East.”