Israel Attacks Lebanon, Oil Prices Surge

Global oil prices surged during Monday morning trading following news of recent Israeli attacks on Lebanon, which caught markets by surprise. This new escalation has triggered fears that the Middle East conflict could expand, potentially obstructing the reopening of the Strait of Hormuz, the world’s most vital energy shipping lane.

According to Refinitiv data, Brent crude rose to US$95.29 per barrel, a 2.36% jump from Friday’s close of US$93.09. Similarly, West Texas Intermediate (WTI) climbed 2.18% to US$92.51 per barrel from its previous position of US$90.54. This surge has erased much of the losses seen late last week when markets were optimistic about easing tensions between the United States and Iran.

The primary driver of this sentiment is the Israeli airstrikes on Beirut on Sunday local time. This military action occurred just days after Israel and Lebanon announced a ceasefire agreement on 3 June, following negotiations in Washington. The situation intensified after Iran responded to attacks on its ally, Hezbollah, by launching missiles into Israeli territory. This new chain of conflict casts doubt on the possibility of immediate peace negotiations between Washington and Tehran.

For energy markets, the most critical issue is not merely the military conflict, but the fate of the Strait of Hormuz. Iran has been obstructing much of the shipping traffic through the strait since the US-Iran war broke out in February. Consequently, global oil supplies have been disrupted, leaving many producing nations struggling to deliver oil to consumers. As the primary transit route for oil and gas exports from the Gulf region, any disruption to the Strait of Hormuz directly impacts the global supply balance.

Amidst these conditions, OPEC+ decided on Sunday to continue increasing production for the fourth consecutive month. Seven core members of the group are expected to raise production targets by approximately 188,000 barrels per day in July. However, this decision has failed to calm the markets, as the primary concern is not production targets, but the actual ability of producing nations to deliver oil to international markets.

OPEC data shows that the group’s production has actually plummeted since the conflict erupted. Average production fell to 33.19 million barrels per day in April from 42.77 million barrels per day in February. Gulf nations, including Saudi Arabia, face significant hurdles in meeting customer demand due to disrupted export routes. Russia is also facing its own pressures after attacks on its energy infrastructure reduced production capacity.

These conditions have led the market to largely ignore the additional OPEC+ production quotas. As long as the Strait of Hormuz does not return to normal operations and geopolitical tensions continue to rise, the risk of supply shortages continues to loom over the global oil market. This has driven prices back towards their highest levels in over three months, despite OPEC+’s ongoing efforts to increase market supply.