Oil price spikes on Iran's attack. Now what?

The oil price remains near six-month highs as the world awaits Israel's response to Iran's drone and rocket attack.

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The oil price initially spiked as news of Iran's attack on Israel raced across the world.

The Brent crude oil price increased 0.7% to US$91.05 per barrel, close to resetting six-month highs.

Brent crude has since retraced to currently be trading for US$90.21 per barrel, up 19% year to date.

With the world now awaiting Israel's response to Iran's launch of 300 drones and missiles into its territory, S&P/ASX 200 Index (ASX: XJO) energy shares are among the few outperformers today.

In afternoon trade on Monday, the ASX 200 is down 0.5%, while the S&P/ASX 200 Energy Index (ASX: XEJ) is up 0.3%.

Buoyed by further potential spikes in the oil price, Woodside Energy Group Ltd (ASX: WDS) shares are up 0.3% today while the Santos Ltd (ASX: STO) share price is up 1.2%.

Even shares in the struggling Beach Energy Ltd (ASX: BPT) are up 0.1%.

What's happening with the oil price following Iran's attack?

Iran's drone and missile strike on Sunday came in retaliation to the 1 April Israeli airstrike on Iran's embassy facilities in Damascus, Syria.

While the strike put global markets on edge, much of that risk had already been priced into energy markets, likely dampening any bigger reaction from the oil price today.

As for what investors can expect next, much of that will depend on how the tense situation unfolds over the coming days or weeks.

Here's what the industry experts are saying.

What are the experts forecasting?

According to David Petraeus, former director of the Central Intelligence Agency (CIA), investors will want to watch what's going to happen with shipping in the Persian Gulf

"It's also about freedom of navigation from the Gulf – the oil and gas that comes from the Gulf and fuels much of the global economy," Petraeus said (quoted by ABC News).

He added that Iran is unlikely to want to see that shipping disrupted either, "because they export about 1.6 million to 1.7 million barrels a day themselves, so keep an eye on that".

Petraeus noted that the oil price is already above US$90 per barrel, saying, "It would really spike if there was something that interfered with freedom of navigation."

Roughly 20% of the world's oil travels through the Strait of Hormuz, a narrow waterway that Iran has previously threatened it could shut down.

"The most feared scenario is the closure of the Strait of Hormuz. I don't think Iran will close the strait, but the risks are growing," Arne Lohmann Rasmussen, head of research at A/S Global Risk Management said (quoted by Bloomberg).

Another potential risk that could send the oil price sharply higher, and likely support ASX 200 energy stocks like Woodside and Santos, is if Western nations crank up sanctions on Iranian oil once more.

According to David Bassanese, chief economist at Betashares (courtesy of The Australian Financial Review):

Iran is one of the world's leading oil producers, and any disruption to its capacity to supply global markets could see oil prices rise further, pushing up global inflation from still overly high levels.

Bassanese warned that "if hostilities with Israel escalate, the United States along with its allies, may come under renewed pressure to strengthen sanctions again".

This could see the oil price exceed US$100 per barrel. While that would be good news for Woodside and Santos shareholders, higher energy costs would stoke inflation and could push out the much-anticipated interest rate cuts from leading global central banks.

Commenting on crude topping US$100 per barrel, Bassanese said, "This outcome would make it difficult for central banks to contemplate interest rate cuts later this year."

Likely alleviating some investor fears today, and keeping a cap on the oil price, an Iranian official released a statement saying, "We see this operation as achieving a complete result and there's no intention to continue the operation."

That's despite the vast majority of Iran's drones and missiles being shot down before achieving their objective.

However, Iranian officials warned that they could respond with a "much bigger" strike if Israel retaliates for Sunday's reprisal attack.

"This war may move down the escalation ladder if the Israeli government follows the advice of the White House and forgoes retaliatory action," RBC Capital Markets LLC analysts said, (quoted by Bloomberg).

A de-escalation here would be most welcome and could see the oil price head back to the mid US$80 per barrel range.

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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