The escalating Middle East crisis threatens to push oil prices to close to $100 per barrel.
The RAC has warned that the price of petrol could reach £1.50 a litre if Iran’s attack on Israel causes crude to rise. Oil prices have already reached six-month highs, but analysts expect them to increase on Monday following Iran’s attack on Israel.
Bob McNally, former energy advisor to the Bush Administration and current CEO of Rapidan Energy Group warned that there was an “escalatory dynamics” in the market, with traders “complacent about the risks posed by Iran”, as well as the fact that the attack on Iran had been more devastating than expected.
He said that “these two factors will lead to a very strong opening for crude oil this week.”
Mr McNally predicted that oil prices would rise at least by three to five dollars per barrel over the next few days and weeks.
Brent crude reached its highest level in October, $92 per barrel, on Friday.
Simon Williams, RAC fuel spokesman, said that if oil prices reached $95 a barrel, petrol could be back at £1.50 a litre. This would be bad for drivers who are already struggling.
Oil is priced in dollars, so a rise in dollar prices due to investors moving their money away from riskier investments would also increase petrol prices.
McNally stated that the oil price is most likely determined by Israel’s response to Iran’s attack. He said that if Israel doesn’t respond to the Iranian strike before the Asian open, the price reaction could be muted. “But there is still some risk pricing left to do.”
Giovanni Staunovo is a commodities analyst with UBS. He said that oil prices could spike in the beginning, since this was the first time Iran has attacked Israel from its own territory. The Israeli response will determine how long the bounce lasts.
Fuel prices may also be impacted by retailers increasing their margins, according to the RAC. The margins for petrol have dropped from 10.5p per litre to 8p this year due to pressure from the competition authorities. However, Mr Williams stated that this could increase again because of factors like increasing staff costs.
If the average retailer margin for unleaded were to return to 10p per litre, even at $90 barrels the £1.50 mark would be exceeded.
According to the RAC, a litre of unleaded fuel costs an average of 149.25p per litre. This is up from 140p a litre at the beginning of the year. Last time it cost more than 150p per litre was in November.
Fuel costs in the US are a major political issue, and rising petrol prices could threaten Joe Biden’s chances of reelection. Capital Economics stated in a report that tensions in Middle East will “add to reasons for [the Federal Reserve] to adopt an even more cautious approach when it comes to rate cuts but won’t stop them from doing so altogether”.
In a weekend of nervous trading, the markets in the Middle East that were open Sunday, including Saudi Arabia’s and Israel’s, fell slightly. Bitcoin fell on Saturday night when Israel claimed Iran sent drones. It recovered some of its losses the next day after the attack was repulsed.
Iran’s oil production has increased in recent years. However, its output may be affected if Western nations tighten restrictions as a response to the attack on Saturday night. According to the RAC petrol prices can take up to 2 weeks to reflect higher prices on the forecourt. This is due to the time that it takes wholesale crude to reach the pumps.