Why oil prices are increasing amidst Iran-Israel tensions | Explained

The story so far: Escalating tensions between West Asian nations Iran and Israel since last week sent prices of oil spiralling upwards with fears mounting about a potential disruption in oil supplies globally.

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The benchmark Brent crude futures had soared about 9% Friday (June 13) to $75.65 for a barrel after it hit an intraday high of $78.50/ barrel — a near five-month high. The paradigm however sought to ease Monday when news reports suggested that Tehran has asked Qatar, Saudi Arabia and Oman to press U.S. President Donald Trump to help Israel agree for an immediate ceasefire. At the time of writing (about 8 p.m.), Brent crude futures were about 2.4% higher from Monday at $74.98/barrel.

Why is the tension causing oil prices to rise?

At the centre of the entire paradigm is Iran’s recurrent threats to close down the Strait of Hormuz. It is the chokepoint that connects the Persian Gulf with the Gulf of Oman and Arabian Sea. For perspective, chokepoints are narrow channels along widely used global sea routes that are utilised for transporting oil through sea. The closure of a chokepoint, even if for a temporary period, can translate to potential delays in supply, reduction in traffic and rise in shipping and insurance costs. All of it culminating into increased price of energy fuel. Though alternatives exist for some chokepoints, but they could entail significant increase in transit times.In fact, from the larger perspective of trade, Pankaj Chadha, Chairman of the Engineering Exports Promotion Council of India explained The Hindu last week that the escalation of the conflict in the Middle East would bar access to the Suez Canal and the Red Sea. “(This) will have a huge cost and time escalation for Indian exports by ship,” Mr. Chadda held.