Oil traders brace for turmoil as Iran crisis imperils supply
Israeli strikes on Iranian energy infrastructure are spooking markets as investors become increasingly concerned that a longer-term oil price spike will fuel inflation and derail hopes of interest rate cuts.
Israel attacked South Pars, the world's largest gas field, at the weekend, causing production to be partially suspended. In later attacks, Israel struck Tehran's main gas depot and one of the country's largest oil refineries in separate parts of the capital. Iran is the third-biggest producer in the Organisation of the Petroleum Exporting Countries.
The targeting of energy assets represents a new front in the conflict, which erupted on Friday when Israel launched a wave of missiles at the Islamic Republic's nuclear program. Oil prices in the United States surged as much as 14 per cent, before settling 7.5 per cent higher at $US73 a barrel.
But traders are bracing for more wild swings when oil market trading resumes on Monday, particularly after Iranian military officials said Tehran was considering closing the Strait of Hormuz – a key shipping route that connects the Persian Gulf and the Gulf of Oman. Crude oil futures posted their biggest single-day increase in more than three years on Friday.
'A significant disruption to these flows would be enough to push prices to $US120 a barrel,' warned ING's head of commodity strategy Warren Patterson. 'Higher oil prices clearly reduce the chances of the Federal Reserve cutting rates in the third quarter.'
The escalation in the Middle East took place in the same week that US inflation data for May came in lower than expected, and as officials in Washington and Beijing appeared to be closing on a deal to avert the worst of the trade tariffs threatened earlier this year.
The positive sentiment pushed the ASX to a fresh record last week, while US equities traded just 1.6 per cent shy of its all-time high.
But Israel's strike on Iran triggered an abrupt reversal on Friday, dragging the S&P 500 down 1.1 per cent as investors fled to the safety of gold, which lifted prices of the precious metal back near all-time highs.
Wall Street's 'fear gauge' – the VIX Index – topped 20, a level that indicates a divide of calm and nervousness in financial markets.
The local sharemarket is expected to follow Wall Street lower, with futures indicating the S&P/ASX 200 will drop 0.2 per cent, or 20 points, to 8532 at the open on Monday.
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