Oil futures hold steady amid anticipation of upcoming escalation steps
Oil futures are rising by nearly 1% across both Brent and West Texas Intermediate crude, following gains exceeding 6% and 7%, respectively, at yesterday’s close.
The inclination of oil prices to rise comes amid growing risks of the conflict worsening again in the Middle East, involving an expansion of the scope of mutual strikes between Iran, the United States, and their respective allies.
This coincides with the absence of any near-term outlook for returning to serious negotiations, let alone the possibility of reaching a deep mutual understanding on outstanding issues. T
his narrative, in turn, keeps the risks in place for oil and gas prices, given the risk of supply chains remaining disrupted, alongside an increasing probability of deepening structural damage to export and production facilities as the conflict extends in time and space.
During the overnight hours, we witnessed renewed US strikes against Iran, coming in response to the latter targeting US soldiers in Jordan.
We also witnessed more complex entanglement across war fronts, through the execution of a joint US-Saudi strike against pro-Iran Popular Mobilisation forces bases in Iraq, resulting in the killing of at least 20 of their troops. These strikes come within the framework of skirmishes and as an extension of the state of no peace and no war, as Saudi Arabia sought to prevent the United States from striking the Houthis in Yemen, which could carry major unknown risks, according to officials quoted by Reuters.
Furthermore, a fire broke out on a US-owned gas storage ship in Egypt, resulting from a drone attack, according to British maritime security company Ambrey, while there is no official confirmation regarding whether the attack actually occurred or not. Also, the Houthis in Yemen plan to impose fees on commercial ships passing through the Bab el Mandeb Strait, but without setting a timeframe for this step, according to sources speaking to Reuters. This step could make the diplomatic path rougher and reduce the chances of returning to the pre-escalation state at present, in light of adding a new variable to an already abandoned negotiation table.
These complex and scattered developments, and the entanglement between fronts across the region’s territories, suggest how the conflict could become wild and spiral out of control, potentially erasing all red lines and imposing scenarios that were not taken into account. All of this comes amid an unofficial truce between the United States and Iran, and not in a state of full-scale regional war. Meanwhile, the absence of both parties from the negotiation table, and the lack of intention to make core concessions regarding fundamental outstanding issues, such as the management of the Strait of Hormuz, frozen Iranian assets, and its nuclear program, keeps the risks of a rolling snowball alive, which could hit oil, gas, and energy facilities at the bottom of the slope across regional territories in Iran and neighboring countries.
While negotiation and refraining from provocation and escalation are the safest solution in this conflict, signs of it are none existent so far, despite vulnerabilities on both sides, Iran and the United States. On the other hand, with the diplomatic path blocked, the United States might resort to severe escalation aimed at achieving a decisive military victory against Iran.
The Wall Street Journal cited sources saying that Central Command Commander Brad Cooper presented a plan for a broad air military campaign against Iran that could extend for two weeks, aiming to strike Iranian missile capabilities to ultimately limit the depletion of US defense missiles. The feasibility of these potential broad attacks remains in doubt until their actual results are seen through silencing Iranian fire, as several Western reports during the peak of previous escalation noted Iran’s ability to maintain a large portion of its stockpiles and missile cities under mountains, despite massive campaigns conducted by the United States and Israel.
We do not know the decision President Donald Trump will make in this regard, whether to move forward with Cooper’s plan or keep things as they are, without a full-scale war or an agreement that draws criticism, relying on whatever crude supplies can be pumped from the Middle East to limit the effects of this conflict, and waiting for Iran to collapse from within.
Pushing Trump toward this type of escalation, as in Cooper’s plan, could involve a large-scale activation of the Yemen, Iraq, and Lebanon fronts, making Iran more hostile, which carries a very high probability of causing chronic and deep structural damage to oil facilities, especially in the Gulf. As long as this type of risk remains present, the bearish narrative for oil prices may remain incomplete. Meanwhile, what might force prices into a temporary decline is the noise Trump creates through his talk about negotiations and stopping the war.
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