Oil prices have soared to nearly $110 per barrel amid Iranian reports that a facility in the world’s largest natural gas field has been hit in an airstrike.
Brent oil was quoted at 108.21 dollars a barrel at the time of the London equities close on Wednesday, up from 101.95 late on Tuesday.
Although below the conflict’s peak of 119.25, this remains well above the 73.08 level recorded on February 27, before tensions escalated.
‘If you thought it would be plain sailing into the FOMC meeting later this evening, think again,’ remarked XTB’s Kathleen Brooks.
‘Markets are back in panic mode. The Brent crude oil price is surging and is higher by another 5% today, the gold price is down 2.8% and is below 5,000 dollars per ounce, bonds are getting sold off and yields are surging and the dollar is rallying.’
She continued: ‘Iran has warned Gulf nations that their energy assets and infrastructure are now legitimate targets…The risk is that an oil shipping crisis is morphing into an oil supply crisis.’
The increase followed a report that facilities belonging to Iran‘s oil industry in South Pars and Asaluyeh were attacked on Wednesday, Iranian state media reported, prompting Tehran to warn that it would target energy installations across Saudi Arabia, the United Arab Emirates and Qatar.
Analysts have warned that any attack in South Pars would raise the possibility of retaliatory attacks by Iran on Gulf energy facilities including those belonging to oil majors in Qatar.
The Brent crude oil benchmark hit $109.91 a barrel on Wednesday afternoon following that facilities belonging to Iran’s oil industry in South Pars and Asaluyeh were attacked
Qatar called it an Israeli attack without mentioning any U.S. role.
The Qatari foreign ministry spokesperson called it a ‘dangerous and irresponsible’ escalation that put global energy security at risk.
Qatar has fully shut its liquefied natural gas production because of the war, cutting 20 percent of the world’s LNG supplies, and any damage to facilities could extend the outage beyond May.
Tasnim news agency said the attacks targeted petrochemical facilities in South Pars and added the extent of the damage was not yet clear.
Following the attack, Iranian gas flows to Iraq were halted as Iran diverted its gas domestically, a senior Iraqi official told Reuters. Tehran supplies between a third and 40 percent of Iraq’s gas and power needs.
The Iran war has dealt a massive energy shock to the global economy by choking off exports of crude oil and liquefied natural gas through the Strait of Hormuz.
Iran has also attacked key export facilities in its Gulf neighbours, putting more upward pressure on energy prices, even though Saudi Arabia, Qatar, Oman, Iraq and the United Arab Emirates are not taking part in the US-Israeli attacks on Iran.
In the case of South Pars, the energy shock would appear to have a different target: not Iran’s exports, but its biggest source of domestic energy supplies in a country that sometimes struggles to product enough electricity.
Iran relies heavily on gas to produce electricity and heat homes.
It is the fourth-largest consumer of natural gas in the world, behind the US, China and Russia, according to the Centre on Global Energy Policy at Columbia University, even though its economy is much smaller, In contrast to other Middle East countries, it uses gas for heating due to its cold climate and much of that use is subsidized, which discourages efficient use. South Pars is the main source.
Although South Pars mainly supplies Iran’s domestic needs, global oil prices rose and gas prices in Europe jumped 7% on the news due to fears of Iranian retaliation on Gulf energy infrastructure.
‘The attack is a serious escalation which threatens retaliatory strikes on Gulf and Israeli production facilities,’ said Andres Cala, geopolitical analyst at energy intelligence firm Montel News.
Iran has suffered power shortages because of interruptions to gas supplies, even though on paper it has huge energy reserves. In July public buildings had to shut down when a heat wave strained the power grid.