Oil surge exposes fragile Gulf risk premium

Oil markets lurched higher on Monday as renewed Israeli strikes on Iran and attacks on Lebanon revived fears that the Middle East conflict could threaten energy flows through one of the world’s most critical crude corridors.

Brent crude rose by more than $4 a barrel at one stage, climbing above $98 before paring gains, while West Texas Intermediate also advanced sharply as traders priced in a higher geopolitical risk premium. Prices later eased after Iran signalled a halt to its latest military operations, but the move did little to remove concern over the durability of any pause in hostilities.

The price jump followed Israeli strikes on Iranian targets, including a petrochemical facility in Mahshahr that Israel said was linked to ballistic missile production. Iran’s Islamic Revolutionary Guard Corps said it retaliated with an attack aimed at a petrochemical site in Haifa. The exchange came after Israeli strikes on Hezbollah strongholds in Beirut over the weekend, further reducing expectations that the wider war could move quickly towards de-escalation.

Energy traders were watching for signs that the confrontation could spill into Gulf shipping lanes, particularly the Strait of Hormuz, through which a large share of globally traded oil and liquefied natural gas passes. Even without confirmed attacks on major Gulf energy infrastructure, the prospect of disruption was enough to push prices higher and unsettle equity and currency markets.

Brent settled well below its intraday peak, near the mid-$90s a barrel, after Tehran said its current operations had ended. WTI also surrendered part of its gains but remained elevated compared with levels seen before the latest exchange. The pullback reflected the market’s assessment that immediate supply loss had not materialised, even as traders remained wary of a sudden escalation.

The conflict has already changed the tone of the oil market. Earlier optimism over a diplomatic opening between Washington and Tehran had helped limit crude gains, but that confidence weakened after the strikes in Lebanon and Iran. Tehran has repeatedly linked any broader settlement to a halt in Israel’s campaign against Hezbollah, making Lebanon a central factor in the energy market’s reading of Iran-Israel risk.

The United States has been pressing both sides to stop attacks, with President Donald Trump urging a halt to the exchange as Washington tries to contain the impact on global markets. The appeal briefly helped stabilise sentiment, but investors remained cautious because previous pauses in fighting have proved fragile.

OPEC+ also remains a key part of the market equation. The producer alliance has agreed to raise July output targets by 188,000 barrels per day, extending its effort to unwind earlier supply cuts. Under normal conditions, additional barrels would have softened prices, but the market treated the move as secondary to conflict risk because any threat to Hormuz could outweigh incremental supply increases from producers.

The Middle East risk premium is now feeding into wider inflation concerns. Higher crude prices raise costs for refiners, airlines, shipping companies and petrochemical producers, while import-dependent economies face pressure through fuel bills, trade deficits and currency movements. For consumers, the impact can emerge through petrol, diesel, power generation and transport costs if elevated prices persist.

Asian markets were particularly sensitive to the move because several major economies depend heavily on Gulf crude. Refiners across the region are likely to reassess freight costs, insurance premiums and delivery schedules if tensions continue. India, China, Japan and South Korea remain among the largest buyers exposed to Gulf supply routes, making any interruption in shipping a direct economic risk.

For oil producers, the price rise offers higher revenue but also creates policy complications. A sustained jump towards triple digits could weaken demand, increase pressure on central banks and accelerate political calls for supply intervention. For consuming nations, the challenge is to manage energy security without fuelling market panic.