Brent Crude Pares Rally After Israel Launches Missile Attack On Iran

Brent crude oil prices pared gains to settle at $87.33 per barrel as of 3:24 p.m. after having surged 4.18% to $90.75 per barrel during early Asian trade on Friday following media reports that confirmed Israel launched a missile attack as a retaliatory measure against Iran's drone attack on April 13.

The benchmark crude oil price have risen 3% since the start of April and 18.43% year-to-date due to various geopolitical tensions in West Asia, along with a tight market for crude supply.

Goldman Sachs has noted that current oil prices include a premium of $5–10 per barrel given the current geopolitical uncertainties.

Last Saturday marked the beginning of the latest escalation of the decade-long conflict between Israel and Iran, with Iranian military officials reportedly launching over 300 missiles and drones towards various targets across Israel, as confirmed by Israeli military authorities.

This surge in hostilities followed a suspected Israeli airstrike on the Iranian consulate in Damascus, Syria, at the beginning of April, resulting in the death of a high-ranking Iranian official and others. In response, Iran initiated a barrage of drones and missiles.

Despite calls from the US and European nations advising against a retaliatory approach that could worsen the situation, Israeli military leaders announced their intent to respond to Iran's attack on April 13.

In the wake of these announcements, Iran issued warnings to Israel regarding potential attacks on its nuclear facilities, threatening reciprocal action if such sites were targeted. These warnings preceded Israel's missile strike against Iran early this morning, as reported by Bloomberg.

Further escalation of the conflict puts the Strait of Hormuz at risk. This narrow sea passage between Oman and Iran is critical for oil, refined products, and LNG transport.

Each day, about 15 million barrels of crude oil and 16 million barrels of refined products pass through the strait, accounting for 15% and 8% of global crude and refined product consumption, respectively.

Additionally, 20% of the global LNG trade moves via the Strait of Hormuz, which includes almost all LNG exports from Qatar and the UAE.

According to International Energy Association estimates, 80% of crude oil exported via the Strait flows to Asia, with China, India, and Japan being the top destinations.

Furthermore, 80% of the liquified natural gas being transported via the Strait is intended for Asian markets, with an estimated 25% of all of Asia’s LNG imports in 2023 delivered via this route.

Any escalations of the conflict could also potentially increase Brent prices further from current levels. Higher Brent crude prices negatively impact the gross marketing margins for Indian oil marketing companies like Indian Oil Corp., Bharat Petroleum Corp., and Hindustan Petroleum Corp.

While the pump fuel prices of petrol and diesel were cut for the first time since May 2022 by Rs 2 per litre on March 14. Oil marketing companies do not continuously change fuel retail prices on a daily basis, thereby exposing gross marketing margins to the risk of higher Brent crude prices that fluctuate daily. Analysts also expect fuel rates for petrol and diesel in 2024 to remain unchanged until elections.

Indian OMCs do, however, have a possible hedge to higher prices by procuring crude at discounts—something the oil marketers have been doing from Russia since 2022. However, benefits enjoyed by the OMCs have narrowed by $5.5 per barrel in nine months of FY24 when compared with FY23, according to Kotak Securities Ltd.

The Nifty Oil and Gas index traded 1% lower compared to the 0.5% fall in the Nifty 50 as of 10:09 a.m.

The Indian oil marketing companies were the top Nifty Oil and Gas losers, with Hindustan Petroleum, Bharat Petroleum and Indian Oil all falling over 4% intrday.