The recent drone attack in northern Jordan, which resulted in the death of three U.S. service members, has been attributed to Iran-backed militants by the White House. This incident is seen as a significant escalation of tensions in the Middle East, and its impact is expected to be felt when financial and commodity markets open for the week.
Analysts predict that oil prices will rise when futures trading begins on Sunday evening. The U.S. response and any actions taken by Iran, especially regarding the Strait of Hormuz, will play a crucial role in determining the extent of this impact. Tariq Zahir, managing member at Tyche Capital Advisors, emphasized the potential disruption to crude oil flow, stating, “We are on the cusp of this escalating, which could seriously impact the flow of crude oil.”
According to U.S. Central Command, the drone strike on a U.S. base in northeastern Jordan resulted in the deaths of three U.S. service members and left over two dozen injured. These casualties mark the first U.S. fatalities in a series of attacks on U.S. bases by Iran-backed militias since the start of the Israel-Hamas war in October.
President Joe Biden has attributed the attack to an Iran-backed militia group and vowed to hold them accountable “at a time and in a manner (of) our choosing.” While U.S. officials are still working to definitively identify the responsible group, it is widely believed that one of several Iranian-backed groups is to blame.
While some congressional Republicans have called for direct retaliation against Iran, the Biden administration’s responses have not yet included such actions. Senator Roger Wicker of Mississippi, the senior Republican on the Senate Armed Services Committee, expressed his stance on X, stating, “We must respond to these repeated attacks by Iran & its proxies by striking directly against Iranian targets & its leadership. The Biden administration’s responses thus far have only invited more attacks. It is time to act swiftly and decisively for the whole world to see.”
Last week, oil futures experienced a rally, partly influenced by production outages in the U.S. and more positive expectations surrounding economic growth.
Oil Prices Stall Despite Middle East Tensions
Despite ongoing tensions in the Middle East, oil prices have failed to sustain a lasting geopolitical risk premium. While there have been brief rallies in response to developments in the Israel-Hamas war, prices remain below their peak earlier this year.
The U.S. benchmark, West Texas Intermediate crude (CL00, +0.28% CL.1, +0.28%), is currently trading around $15 lower than its mid-$90s peak set in September. Similarly, the global benchmark, Brent crude (BRN00, +0.08%), briefly surpassed $80 per barrel last week.
The recent attacks by Iran-backed Houthi militants on Red Sea shipping routes have caused disruptions in the physical market. However, these incidents have not significantly impacted the flow of crude from the Middle East.
One major concern is Iran’s potential move to close off the Strait of Hormuz, the world’s largest oil-transportation chokepoint. This narrow waterway connects the Persian Gulf with the Gulf of Oman and the Arabian Sea. It is only 21 miles wide at its narrowest point, with a two-mile shipping lane in either direction separated by a two-mile buffer zone.
In the first half of 2023, approximately 21 million barrels of crude oil passed through the Strait of Hormuz each day. This accounts for about a fifth of daily global consumption, according to the U.S. Energy Information Administration.
Interestingly, despite tensions in the region, the U.S. stock market has largely remained unaffected. Both the S&P 500 (SPX) and the Dow Jones Industrial Average (DJIA) have bounced back, reaching record highs in recent weeks.
While oil remains a focal point for investors, they are also keeping an eye on other assets traditionally seen as safe havens during periods of geopolitical tension. Markets will be closely monitoring U.S. Treasurys (BX:TMUBMUSD10Y), the U.S. dollar (DXY), and gold (GC00, +0.04%) for any knee-jerk reactions.
—Associated Press contributed.