Israel/Iran War Could Send Crude to $130 a Barrel

Crude oil was one commodity few were discussing. At least until June 13. Before that, West Texas Intermediate was trading near a 52-week low near $60 per barrel, on concerns about how U.S. President Donald Trump’s tariffs would impact the economy. There was also growing optimism about a U.S.A./Iran nuclear agreement, which would likely result in Iranian oil hitting global markets.

The latter didn’t happen. On June 13, Israel struck the heart of Iran’s nuclear and military sites with Iran retaliating. At the time, U.S. President Trump warned that Iran needed to make a deal or further attacks would be even “more brutal.” Iran, for its part, has said Israel will face “huge and destructive consequences.”

The two sides traded attacks on a daily basis. At the time, there were concerns that Iran could retaliate by blocking access to the Strait of Hormuz, a key shipping route for energy, with approximately 20% of global oil and liquid natural gas (LNG) passing through the critical, narrow channel.

On June 21, tensions in the area ramped up after the U.S. entered the war, bombing three key Iran nuclear sites. While Israel and Iran continue to launch attacks, the U.S. has maintained that it does not want a war with Iran, rather, the bombings are an attempt to bring Iran back to the negotiating table.

Iran doesn’t see it this way. In fact, Iran has threatened to activate sleeper cells—covert spies or terrorists who live in the U.S. but remain inactive until given orders.

What Is the Straight of Hormuz?

Iran’s parliament has also officially stated that it would like to block the Strait of Hormuz.

The Straight of Hormuz is 33 kilometers wide at its narrowest point, but the available shipping lanes are just a few kilometers wide. The straight is used by major OPEC members, including Iran, Saudi Arabia, Kuwait, and Iraq to send crude oil and petroleum products around the world, especially to Asia.

Can Iran unilaterally just take control of the Strait of Hormuz? The passage is legally governed by the United Nations Convention on the Law of the Sea (UNCLOS), which says vessels are allowed the pass through international straits, like Hormuz, so long as the journey is expeditious.

What’s written on paper and what happens in the real world can be very different. Militarily, Iran is to the North of the Strait of Hormuz while Oman, which is to the south, plays a more diplomatic role.

How High Could Oil Prices Go?

Iran taking control of the straight could result in one-fifth of the world’s oil supply, or 20 million barrels of oil equivalent, being removed from the market. This could cause a big drawdown of crude oil inventories and result in panic buying, leading to a massive spike in energy prices.

Since the opening days of the attacks, oil prices jumped more than 20% to around $75 per barrel. But since the U.S. has become involved, some analysts believe crude oil prices could hit $100 per barrel. JPMorgan believes crude could hit $130 per barrel in a worst-case scenario.

President Trump, who campaigned on no new wars and low energy prices, has ordered the oil sector to keep prices low and increase output after the U.S. attacked Iran. But most oil and gas companies in the U.S. and Canada are focused on shareholder returns, not political optics.

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