Key Takeaways
- Oil futures soared on Friday after Israel attacked Iranian nuclear facilities, raising concerns that a larger conflict could disrupt global oil supplies.
- Gasoline prices were down 12% year-over-year in May, one of the primary reasons inflation ran just slightly above the Federal Reserve’s 2% target.
- Analysts say an escalation that meaningfully disrupts oil trade—like Iran closing the Strait of Hormuz or Israel targeting Iran’s oil infrastructure—is unlikely, and oil prices are expected to settle once tensions ease.
Oil prices soared on Friday as tensions in the Middle East flared following Israel’s attack on Iranian military and nuclear targets.
West Texas Intermediate (WTI) crude oil futures, the U.S. benchmark, were up about 7.5% at $73.12 a barrel in recent trading Friday, after soaring as much as 14% overnight, crude’s biggest intraday jump in years. Brent crude futures, the global benchmark, were also more than 7% higher at $74.38.
Analysts at JPMorgan warned earlier this week that an all-out conflict between Israel and Iran, one of the world’s largest oil producers, could send oil prices above $100 for the first time since Russia’s invasion of Ukraine disrupted global supply in 2022.
That, in turn, might aggravate inflation at a time when economists are already watching for a tariff-driven resurgence. Ryan Sweet, chief U.S. economist at Oxford Economics, estimates every $10 increase in oil prices would translate into a half-percentage-point increase in the inflation rate, The Wall Street Journal reported Friday.
Lower Oil Prices Help Tamp Down Inflation
Low oil prices have been instrumental in keeping inflation in check this year. The Consumer Price Index (CPI) rose 2.4% year-over-year in May. Inflation would have run further above the Federal Reserve’s 2% target if gas prices hadn’t fallen 12% over the last year. JPMorgan estimates that oil prices at $120 a barrel could push CPI up to 5%.
However, most analysts say the worst-case scenario is unlikely. “The primary market concern lies with Iran potentially closing the Strait of Hormuz,” through which about one-fifth of the world’s oil supply transits, said Kristian Kerr, Head of Macro Strategy at LPL Financial. “We think this is unlikely for now given Iran’s need to maintain oil sales to China,” Kerr added.
There is also the risk that either Israel or Iran targets regional oil infrastructure to escalate the conflict. That would have a meaningful impact on global oil supply and, thus, gas prices.
Barring such an escalation, experts predict oil prices will settle after Friday’s surge. Goldman Sachs analysts on Friday acknowledged that the conflict would boost oil’s risk premium in the near term, but maintained their prediction that WTI will trade around $55 a barrel at the end of the year.
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