Middle East energy flows not expected to be interrupted by rising tensions

Investing.com — Escalating tensions in the Middle East following an aerial attack on Israel by Iran will not lead to sustained interruptions in energy flows out of the oil-rich region, analysts from UBS have predicted.

However, in a note to clients on Wednesday, the analysts flagged that the long-standing regional conflict has contributed to previous periods of market volatility as investors fretted over possible constraints on oil supplies.

Iran has said that its military barrage on Israel — its largest ever on the country — is over, but warned it would resume the attack if there are further provocations.

Israel could launch a “significant” response in the coming days that may target oil output facilities inside Iran and other strategic sites, according to US news website Axios.

Israeli Prime Minister Benjamin Netanyahu has promised a retaliation to Tehran’s airstrikes, saying in a statement on Tuesday that Iran “made a big mistake” and “will pay for it.”

The US has also said there will be “severe consequences” for Tehran’s actions, with Defense Secretary Lloyd Austin adding that Washington is “well-postured” to defend its interests in the Middle East.

Iran’s assault was sparked by recent attacks by Israel on Lebanon-based Hezbollah as well as the ongoing war in Gaza, Tehran said. The US, the United Nations and European Union have called for a ceasefire in Lebanon, but fighting continued there early on Wednesday.

The UBS analysts said that, although the situation has the potential to deteriorate further, they expect it will “stop short of an all-out war between Israel and Iran, including their respective allies.”

But in the event that a broader war does erupt in the region, they warned that disruptions to oil supply routes through the critical Strait of Hormuz or damage to key oil infrastructure could drive prices above $100 per barrel for several weeks.

Oil prices rose Wednesday, adding on to gains of more than 5% in the prior session that were fueled by Iran’s assault on Israel.

By 03:43 ET, the Brent contract climbed 2.6% to $75.50 per barrel, while US crude futures (WTI) traded 2.8% higher at $71.80 per barrel.