Oil prices topped $100 a barrel on Wednesday for the first time in six weeks as an escalation in fighting by US and Iranian forces deepened concerns over supply from the region and raised fears of inflationary pressures and higher energy costs for consumers and businesses.
Brent, a global oil benchmark, has risen by a quarter since early last month as hopes fade for a permanent resolution to the six-month-old US-Iran conflict.
The rally accelerated this week after Iran-backed Houthi attacks on Saudi energy facilities set oil installations ablaze, increasing the risk that disruptions could spread across the wider Gulf region.
Oil's break above the $100 level signals growing concerns that the global market has become increasingly vulnerable after months of supply losses due to disruptions to oil exports through the Strait of Hormuz and inventory drawdowns.
"Oil investors are expressing their view about the impact of the latest bout of escalation in the Middle East in an unambiguous way," said Tamas Varga, of oil broker PVM. "They are voting with their dollar, and this vote strongly indicates that unless the Strait of Hormuz re-opens, and oil starts flowing again uninterruptedly, supply will not be aligned with demand in the foreseeable future."
While Brent futures have yet to reach the $126 mark struck earlier in the conflict, a sustained period above $100 a barrel could be felt beyond energy markets, raising transport and manufacturing costs, reigniting inflation fears and keeping interest rates higher for longer.
Six months of reduced oil exports from the Middle East due to the war in Iran have helped deplete oil stocks in some key consumers.
The US has also drawn heavily on its Strategic Petroleum Reserve, leaving it at its lowest level since 1982. The reserve now holds 289.7mn barrels after years of releases by former President Joe Biden and President Donald Trump aimed at cushioning consumers from high fuel prices.
Persistently high pump prices above $4.00 a gallon are a risk for Trump's Republican Party, which will be campaigning to retain narrow majorities in both houses of Congress during November's midterm elections.
The West's energy watchdog, the International Energy Agency, in March announced a release of 400mn barrels from emergency oil reserves and says the global economy still has substantial stocks. About three quarters of this have been released.
Total global oil stocks, including all types such as commercial stocks, the US SPR, Chinese stocks and stocks on water, look fairly comfortable, according to the IEA.
Still, a big chunk of those are either in transit, committed to buyers or held in countries that provide little public information about available reserves, such as China.
Prices remain below the peak reached in April, when Brent surged as high as $126 a barrel. But the return to oil above the triple-digit level poses a risk to a market with little room for error, as reduced inventories and limited spare capacity leave supplies vulnerable to further disruptions.
About 10mn bpd, or about 10% of world oil demand, of oil exports are still missing as a result of the Iran war, according to estimates from Vortexa, which tracks oil shipments.
While some producers including the US, Canada and Guyana have ramped up output, the IEA said last month it expected global oil supply would fall this year by 4.3mn bpd, or about 4%.
With emergency stockpiles depleted and millions of barrels a day already offline, analysts say the market has less capacity to absorb new disruptions than it did at the start of the war.
"I think the market is trying to treat this rise in energy prices as a one-off. It's not. This is structural. It's not going away, and it's part of what I would argue as a security premium. And it's only going to get bigger," said Jeffrey Currie, co-chairman at Abaxx Markets.
