Reported by Weng Patrick Atokor | journalist at Weng Global
Brent crude oil has climbed above the $90-per-barrel mark as renewed tensions surrounding the Strait of Hormuz raise concerns about further disruptions to global energy supplies.
The international benchmark rose sharply on Monday before continuing its upward movement on Tuesday, with Brent reaching around $91.14 per barrel as investors reacted to deteriorating prospects for a diplomatic resolution between the United States and Iran.
The latest increase reflects growing fears that military escalation around the strategically important waterway could further restrict the movement of oil tankers and other commercial vessels.
Iran threatens military escalation
The latest market pressure followed reports that Iran had shifted towards a more offensive military posture after negotiations with the United States failed to produce a lasting agreement.
Iran has warned that it could take military action in the Strait of Hormuz if diplomatic efforts fail, increasing fears among traders that the already-restricted shipping route could face even greater disruption.
The development comes after a temporary agreement between Washington and Tehran expired without a broader peace arrangement. The collapse of the diplomatic process has renewed uncertainty over the future of the conflict and the security of energy shipments from the Gulf.
The United States has also ruled out extending the existing ceasefire arrangement, adding to concerns that hostilities could intensify.
Why the Strait of Hormuz matters
The Strait of Hormuz is one of the world’s most strategically important energy corridors. Large volumes of crude oil and petroleum products traditionally pass through the narrow waterway every day, connecting major Gulf producers with international markets.
Any sustained disruption could therefore have consequences far beyond the Middle East.
Reuters reported that tanker traffic through the strait has slowed dramatically. Only five tankers passed through on one Saturday, while none were recorded the following day, compared with 31 vessels during the previous weekend.
The reduction in shipping activity has intensified fears of a supply squeeze, particularly if the situation persists.
For oil traders, the possibility of a prolonged disruption means prices must account for what is known as a geopolitical risk premium. Buyers are willing to pay more because of uncertainty over whether future supplies will reach the market normally.
Oil market reacts
Brent crude closed at about $90.87 per barrel on Monday, representing a rise of roughly 2.7 per cent. U.S. West Texas Intermediate crude also advanced, reaching around $84.50 per barrel.
On Tuesday, Brent moved above $91 as concerns over the U.S.-Iran standoff intensified.
The increase represents a significant shift for oil markets, which had been closely watching diplomatic efforts between Washington and Tehran for signs that tensions could ease.
Instead, the collapse of negotiations has encouraged traders to price in a greater possibility of prolonged disruption.
The market is particularly sensitive to developments around Hormuz because alternative routes for transporting Gulf oil are limited and generally more expensive.
Impact on fuel prices
A sustained rise in international crude prices could eventually translate into higher fuel costs in countries that depend heavily on imported petroleum products.
Consumers could face higher prices for petrol, diesel, aviation fuel and other petroleum-based products if the increase in crude prices persists.
Higher energy costs can also increase transportation and production expenses for businesses. Companies may pass some of those additional costs to consumers, potentially putting renewed pressure on inflation.
The effect, however, will differ from country to country depending on exchange rates, domestic fuel pricing policies, government subsidies, local refining capacity and the amount of crude or refined products imported.
Nigeria and other oil-producing countries
For oil-producing countries such as Nigeria, higher crude prices can provide an opportunity to increase government and foreign-exchange revenues.
However, the benefits are not automatic.
Nigeria’s earnings depend on production levels, crude grades, international prices, government fiscal arrangements and the country’s ability to maintain stable oil output.
Higher international prices could therefore strengthen export earnings if production remains steady.
At the same time, higher global energy prices can create difficulties for countries that import refined petroleum products or rely on international markets for other energy-related inputs.
Global inflation concerns
The latest oil rally is also attracting attention from economists because energy prices have a strong influence on inflation.
When crude prices rise substantially, transportation and manufacturing costs can increase. Airlines, shipping companies, logistics operators and other businesses may face higher operating expenses.
Those increases can eventually feed into prices paid by households.
The possibility of another sustained oil-price surge is therefore a concern for central banks that are attempting to control inflation without severely weakening economic growth.
Reuters reported that the current rise is being driven by fears over supply disruptions as the diplomatic situation between the United States and Iran deteriorates.
What happens next?
The direction of oil prices will largely depend on developments in the Middle East, particularly the future of negotiations between Washington and Tehran and the level of shipping activity through the Strait of Hormuz.
If diplomatic efforts succeed and tanker traffic returns to normal, some of the geopolitical premium currently built into crude prices could disappear.
However, a further military escalation or prolonged restriction of shipping could push prices considerably higher.
Analysts are already watching whether Brent can remain above the $90 level. Goldman Sachs had previously projected that Brent could remain within an $80-$90 range until there was either a new U.S.-Iran agreement or a significant escalation in the conflict.
The latest move above $90 suggests the market is now placing greater weight on the possibility of escalation.
For consumers and businesses around the world, the key concern is whether the current increase will be temporary or develop into a longer-lasting energy shock.
For now, oil markets remain highly sensitive to every development around the Strait of Hormuz, making the waterway one of the most closely watched geopolitical flashpoints in the global economy.
Sources: Reuters; Punch; Trading Economics; Al Jazeera.
