By David Uberti. Media: Wsj
A rise in oil prices intensified Thursday after President Biden suggested that U.S. officials are considering whether to support an Israeli strike on Iranian oil facilities, a move that could push gasoline prices higher just weeks before the presidential election.
Benchmark U.S. crude jumped 5.1%, to $73.71, its largest one-day gain since the early stages of Israel’s war on Hamas a year ago. The tremors weighed down U.S. stock indexes and left investors scrambling to understand the potential fallout of a broader war.
Asked if he would support Israel attacking Iran’s oil facilities, Biden replied, “We’re discussing that,” before adding “I think that would be a little…” and trailing off.
Biden added that the U.S. advises the Israeli government on military operations but doesn’t dictate them. “And there’s nothing going to happen today,” Biden said. “We’ll talk about that later.”
The oil market has been on edge since Tuesday, when Iran’s launch of one of the largest ballistic-missile attacks in history against Israeli targets reignited fears of a war between two of the region’s largest military powers.
Israel, which has mounted a deadly campaign against Tehran-backed militant group Hezbollah in recent weeks, has promised forceful retaliation. Israeli officials have given few public clues on how they intend to respond.
Oil traders have snapped up supplies in response, bidding up prices that in recent weeks had languished near their lowest levels since 2021. Lower gasoline prices this summer helped pull down U.S. inflation, putting money back in drivers’ pockets and likely buoying Americans’ view of the economy—potentially a key factor in a presidential race that remains neck and neck less than five weeks from election day.
Americans paid an average of $3.18 for a gallon of regular gasoline last week, according to the federal data, down about 13% since April. The diesel used by truckers to haul goods cross-country and farmers to power machinery hasn’t been this cheap since Russia’s invasion of Ukraine scrambled global energy markets.
Inflection Point
Now, depending on Israel’s next move, analysts say the risk of a wider war in the Middle East holds the potential to bring energy costs back to the fore while the candidates seek to win over inflation-weary voters.
The volatility has upended what has been a strikingly placid oil market. Despite spiraling violence in the Middle East, including an exchange of strikes between Israel and Iran this spring, there have been few meaningful disruptions to the physical supply of oil.
Analysts warn that could change depending on Israel’s next move. “It’s hard to overstate just how complacent the oil market has become,” said Robert McNally, president of the Washington-based consulting firm Rapidan Energy Group.
Some traders sought to take advantage of that perception, appearing to bet on oil prices running up to $100 a barrel from a recent $73. Trading in call options tied to the $1.4 billion U.S. Oil Fund surged to the highest level in more than two years this week, according to Cboe Global Markets data.
Such trades confer the right to buy shares at a specific price, known as a strike, by a stated date. Some of the most popular trades in recent sessions have been tied to the fund jumping to $80 or $85.
McNally compared the broad oil market’s muted response until today to “The Boy Who Cried Wolf,” a fable in which a shepherd lulls nearby villagers through repeated false alarms. “That story did not end well for the boy and for the village,” McNally said.
Big Exporter
Iran pumped about 3.3 million barrels of oil a day in the second quarter, according to the U.S. Energy Information Administration. Ship-tracking firms and traders say that the country often exports half or more of that output despite existing U.S. sanctions.
Any disruptions to those supplies now would mark an escalation in the conflict and could contribute to diplomatic tensions between Israel and the U.S. after Washington’s yearslong inflation fight. But analysts say that there are a range of potential targets among Iran’s energy infrastructure that could limit spillover impacts on the global economy.
“A lot of what Iran is producing is being consumed internally,” said Gregory Brew, a senior analyst at Eurasia Group who focuses on oil and Iran. That domestic infrastructure “is old, it’s in various states of disrepair. So Israeli strikes against those facilities could have a significant effect on Iran’s economy, even if it doesn’t affect the amount of crude Iran can export.”
A huge portion of the Islamic Republic’s shipments abroad run through a massive terminal on Kharg Island in the Persian Gulf, where skyscraper-sized tankers ferry supplies to refineries in Asia and elsewhere. ClearView Energy Partners recently estimated that an Israeli attack on that facility could add more than $12 a barrel to oil prices—equivalent to about 30 cents a gallon of gasoline—depending on the damage.
An even bigger fear is whether an Iranian response to such strikes could include an attempted closure of the Strait of Hormuz, a key chokepoint for oil and refined petroleum exports from other Gulf nations. A seven-day interruption in shipments could mean a jump in per-barrel oil prices by as much as $28, ClearView estimated, or about 67 cents a gallon.
“That is the worst-case scenario,” added Brew, of Eurasia Group.
The uncertainty adds an unpredictable variable to the presidential campaign in which former President Donald Trump has hammered Biden’s stewardship of the economy and promised to slash Americans’ gasoline costs if elected.
Until now, markets were a step ahead of him—to Vice President Kamala Harris’s potential benefit—with prices retreating due to lackluster demand growth from the Chinese and American economies this year. Federal data show the national average price of regular gasoline last week was cheaper than it was in the same period in three of the four years during the Trump administration, when adjusted for inflation.
“Falling prices improve [consumer] sentiment like rising prices reduce sentiment,” said Carola Binder, an economics professor at the University of Texas at Austin who has studied gas prices’ impact on Americans’ outlook. “We see them all the time, and it’s really easy to compare them from one day to the next in a way it wouldn’t be with other things we buy.”