Oil Prices Rise on Iran Attack, Fall on Potential Sanction Relief

U.S. Considers Easing Restrictions on Iranian Oil Amidst Strait of Hormuz Tensions

Oil prices dipped slightly Friday as the U.S. Treasury Department signaled a potential shift in policy regarding sanctioned Iranian crude oil currently held in tankers. Treasury Secretary Scott Bessent indicated Thursday that the Biden administration may soon remove sanctions on approximately 140 million barrels of Iranian oil, a move designed to stabilize global prices following Iran’s recent closure of the Strait of Hormuz and attacks on shipping vessels. International benchmark Brent crude futures fell 0.4% to $108.23 per barrel during early European trading, while U.S. West Texas Intermediate futures decreased 0.6% to $95.56.

The potential release of Iranian oil represents a calculated gamble by the U.S. As it navigates escalating tensions in the Middle East. Iran’s actions, including the closure of the vital shipping lane through which roughly 20% of the world’s oil supply passes, have sent shockwaves through energy markets, pushing prices above $100 per barrel for much of the past two weeks. Bessent framed the move as a temporary measure to increase supply and “use the Iranian barrels against the Iranians to keep the price down” for the next 10 to 14 days, according to a report from Fox Business Network.

A Temporary Fix with Uncertain Long-Term Effects

The strategy mirrors a recent decision by the Treasury Department to temporarily allow the sale of sanctioned Russian oil that was also stranded on tankers, adding roughly 130 million barrels to global supplies. However, experts caution that the impact of releasing Iranian oil may be limited. David Tannenbaum, director of Blackstone Compliance Services, described the move as “bananas,” highlighting the potential for Iran to benefit financially from the sales, potentially funding its ongoing military efforts. This raises concerns about the effectiveness of the policy in achieving its stated goal of curbing prices without inadvertently bolstering the Iranian regime.

Before the current conflict, China was the primary purchaser of Iranian oil, securing supplies at discounted rates despite U.S. Sanctions. Bessent suggested that lifting sanctions on oil already at sea could redirect some of those supplies to other countries, such as India, Japan, and Malaysia, while forcing China to pay market prices. The Treasury Department has not yet detailed how a potential waiver would function or whether it would include safeguards to prevent funds from flowing back to the Iranian government.

The Strait of Hormuz and Global Oil Supply

The Strait of Hormuz, a narrow waterway separating Iran and Oman, is a critical chokepoint for global oil trade. Iran’s control over this strategic passage gives it significant leverage in regional and international affairs. The recent closure of the strait, coupled with attacks on tankers, has underscored the vulnerability of oil supplies and the potential for significant price spikes. The U.S. Is attempting to mitigate these risks by increasing supply through the potential release of Iranian oil, but the long-term solution remains uncertain.

Citi’s Revised Oil Price Outlook

The escalating tensions have prompted revisions to oil price forecasts. Citi recently raised its near-term outlook, anticipating Brent and West Texas Intermediate (WTI) crude to climb to $120 per barrel over the next one to three months. In a “bull-case” scenario, where disruptions intensify, Citi projects prices could reach $150 per barrel. However, the bank’s base case assumes de-escalation within four to six weeks, which would allow Brent prices to ease back to $70–$80 by year-finish. This illustrates the significant uncertainty surrounding the situation and the potential for rapid price fluctuations.

Saudi Arabia’s Price Concerns

Saudi Arabia, a key player in the global oil market, also anticipates potential price increases. According to the Wall Street Journal, Saudi oil officials believe crude prices could surpass $180 per barrel if disruptions persist beyond late April. This underscores the widespread concern among major oil producers about the potential for a prolonged supply shock.

Impact on Crude Spreads and Freight Costs

The conflict has also widened key crude spreads, reflecting increased demand for oil and higher freight costs. Citi has raised its Brent-WTI forecasts to account for elevated transportation expenses and strong demand from the U.S. Gulf Coast for inland barrels. This suggests that the impact of the conflict extends beyond headline crude prices, affecting the entire oil supply chain.

Israel’s Role and Potential for De-escalation

Israeli Prime Minister Benjamin Netanyahu has stated that Israel is assisting U.S. Efforts to reopen the Strait of Hormuz. He also asserted that Iran no longer possesses the capability to enrich uranium or produce ballistic missiles, suggesting a potential weakening of Iran’s military capabilities. Netanyahu’s comments hint at a possible path toward de-escalation, but the situation remains highly volatile.

What’s Next: Waiver Details and Market Response

The immediate next step hinges on the specifics of the potential waiver for Iranian oil sales. The Treasury Department must determine the scope of the waiver, including whether it will apply only to oil already at sea and whether it will include provisions to prevent funds from reaching the Iranian government. The market’s response will be closely watched, as investors assess the potential impact on global oil supplies and prices. Further developments in the conflict, including any diplomatic efforts or military actions, will also play a crucial role in shaping the future of oil markets.