With Iran and Israel in conflict, oil traders brace for supply turmoil
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Oil-watchers are bracing for a further price rally after Israeli strikes on Iranian energy assets heightened the risk to Middle East supplies.
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Israel temporarily knocked out a natural gas processing facility linked to the giant South Pars field, Iran's biggest, in an attack on Saturday, and targeted fuel storage tanks during strikes as part of its campaign against Tehran's nuclear program.
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While the attack was concentrated on the Islamic Republic's domestic energy system rather than exports to international markets, oil traders and analysts are preparing for more turmoil after prices surged the most in three years on Friday.
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Despite U.S. sanctions, Iran remains the third-biggest producer in the Organization of the Petroleum Exporting Countries. Its allies in Yemen, the Houthi militants, have harassed ships in the region and Tehran has in the past threatened to halt the Strait of Hormuz, a critical transit point in the Persian Gulf. It has, however, never blockaded the key maritime chokepoint.
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'The escalating, likely prolonged, conflict and its expansion to economic targets with civilian casualties should build some more risk premium into crude early this week,' said Bob McNally, president and founder of Rapidan Energy Advisers LLC and a former White House energy official.
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West Texas Intermediate futures, the U.S. benchmark, rallied as much as 14 per cent on Friday before settling near US$73 a barrel. A closure of Hormuz could propel international prices to as high as US$130, JPMorgan Chase & Co. has predicted. A jump in oil would add to inflation pressures around the world.
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Israel's strike on Saturday triggered a powerful explosion and fire at the onshore Phase 14 gas processing plant and forced the shutdown of a production platform at the South Pars field, according to a report from the semi-official Tasnim news agency.
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'Now that threshold has been crossed, there will be questions about whether Israel is going to target more Iranian energy infrastructure,' said Richard Bronze, head of geopolitics at consultant Energy Aspects Ltd. 'We appear to be in an escalatory cycle.'
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