.png){kind=logo}
On Tuesday, oil prices surged sharply by more than 2% as worries over oil supply devastation in the Strait of Hormuz grew. Brent crude futures surged up by $2.74, or 2.7%, to $102.95 per barrel, and US West Texas Intermediate (WTI) crude leapt by $2.45, or 2.6%, to $95.95 per barrel.
The high rise in oil prices comes with the continued war in the Middle East, especially the war between the US, Israel, and Iran, which has had a high effect on oil supply around the world.
Heavy tensions in the region have disrupted the operations of the Strait of Hormuz, which is a major choke point in the global oil trade. It is estimated that approximately 20% of the world's oil shipments go through this waterway, and its blockage poses a major concern to the global energy markets.
The possible long-term impacts of such disruptions have raised alarm among analysts, especially since shipping companies are having difficulties insuring their passage through the waterway, thus complicating matters further.
On Monday, the Iranian forces attacked the main oil and gas production sites in the region, which is a new step in the conflict. More significantly, one of the largest natural gas fields in the world, the Shah gas field in the United Arab Emirates (UAE), was burned down due to being targeted by a drone.
This accident caused the stop of activities in the region, and officials have been analyzing the extent of the damage. Other targets were also oil infrastructure in Iraq and the major port and oil storage system in Fujairah in the UAE.
The production shutdown in the UAE, which is the third-largest oil producer in OPEC, has drastically decreased the amount of output in the country, with estimates suggesting that daily crude production has been halved since the conflict broke out in late February.
This has had a ripple effect on the entire oil market, as traders find it hard to find alternative sources of supply. As the Strait of Hormuz is mostly blocked, the Gulf states, among them the UAE, are experiencing the threat of being forced to close their remaining export outlets.
Also Read: Oil Prices Rally Cools After G7 Discusses Coordinated Strategic Reserve Release
The international reaction to these upheavals has been half-mixed. US President Donald Trump has urged Western allies to help reopen the Strait of Hormuz through the deployment of warships to guard tankers.
Nevertheless, some of the important allies, such as Germany and Japan, have rejected the proposal, citing the fear of further escalation in the region. This absence of collaboration between nations has provided the US with fewer chances to guarantee the security of oil shipments.
The current state of affairs has also caused speculation of possible actions to be taken in curbing the escalating energy prices. The director of the International Energy Agency (IEA) proposed that member states could produce additional oil in their strategic reserves to ease the burden on world supply.
The IEA already arranged for the 400 million barrels of these reserves to be released in an effort to stabilize the prices, although analysts believe that the magnitude of the damaging effect might need further action.
In the short-term, the market is concerned with the length of the conflict and the long-term destruction of oil infrastructure in the Gulf.
Furthermore, the potential of new attacks on vital infrastructure like oil terminals and storage facilities has further increased uncertainty in the oil market. Traders are keeping a close watch as any further escalation would result in even higher prices and more disruptions in the global oil supply chain.
