Oil Prices Jump, Asian Markets Plunge As Middle East Crisis Escalates

Asian markets plunged while oil prices briefly hit five-month highs on Monday amid concerns of disruption to energy markets after the United States joined Israel in attacking Iran's nuclear facilities, escalating the Middle East crisis. Iran is the world's ninth-biggest oil-producing country, with an output of about 3.3 million barrels per day.

Tehran exports almost half of that amount and keeps the rest for domestic consumption. And if Tehran decides to retaliate, observers say one of its options would be to seek to close the strategic Strait of Hormuz -- which carries one-fifth of global oil output.

Oil prices were up over 2 per cent, their highest since January. Brent was up a relatively restrained 2.7 per cent at $79.12 a barrel, while US crude rose 2.8 per cent to $75.98.

Asian stocks were also lower as traders digested the weekend's events, as investors anxiously awaited Tehran's retaliation to US attacks on Iranian nuclear sites. Iran has threatened US bases in the Middle East as fears grow of an escalating conflict in the volatile region.

Share markets in the US showed some resilience, with S&P 500 futures falling a moderate 0.5 per cent and Nasdaq futures down 0.6 per cent.

In the Asian market, Tokyo's key Nikkei index was down 0.6 per cent while Seoul fell 1.4 per cent and Sydney was 0.7 per cent lower. MSCI's broadest index of Asia-Pacific shares outside Japan also fell 0.5 per cent.

In Europe, EUROSTOXX 50 futures lost 0.7 per cent, while FTSE futures fell 0.5 per cent and DAX futures slipped 0.7 per cent.

Europe and Japan are heavily reliant on imported oil and LNG, whereas the United States is a net exporter.

In commodity markets, gold edged down 0.1 per cent to $3,363 an ounce. The dollar, meanwhile, edged up 0.3 per cent on the Japanese yen to 146.48 yen, while the euro dipped 0.3 per cent to $1.1481. The dollar index firmed 0.17 per cent to 99.078.

There was also no sign of a rush to the traditional safety of Treasuries, with 10-year yields rising 2 basis points to 4.397 per cent.

More Volatility Expected

Market participants are expecting more price gains amid mounting fears that Iran may retaliate against the US with the closure of the Strait of Hormuz-- which is only about 33 km (21 miles) wide at its narrowest point and sees around a quarter of global oil trade and 20 per cent of liquefied natural gas supplies.

Tehran has in the past threatened to close the strait but has never followed through on the move. But, following America's action, Iran's Press TV reported that the Iranian parliament approved a measure to close the strait.

Optimists are hoping that Tehran may back down now that its nuclear ambitions have been curtailed, or even that regime change might bring a less hostile government to power there.

However, analysts at JPMorgan cautioned that past episodes of regime change in the region typically resulted in oil prices spiking by as much as 76 per cent and averaging a 30 per cent rise over time.

"Selective disruptions that scare off oil tankers make more sense than closing the Strait of Hormuz given Iran's oil exports would be shut down too," Vivek Dhar, a commodities analyst at Commonwealth Bank of Australia told Reuters.

"In a scenario where Iran selectively disrupts shipping through the Strait of Hormuz, we see Brent oil reaching at least $100/bbl," he added.

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