Crude futures settled higher in after-hours trading on Thursday as escalating attacks on shipping in the Middle East raised fears that the conflict between the US and Iran could drag on and further disrupt global energy supplies.
Front-month West Texas Intermediate futures rallied 8.3% to $103.93 per barrel, while Brent futures surged 7.8% to $108.31/bbl.
Gelber & Associates strategists said that the prospect of simultaneous pressure on both export corridors is raising shipping risk and reducing confidence that rerouting can offset constrained Gulf traffic.
US commercial crude oil inventories decreased by 400,000 barrels to 424.1 mmbbls in the week ended Sep. 4, the Energy Information Administration said in its weekly report released Thursday.
Crude inventories matched the five-year average for this time of year, the EIA said. The draw is significantly below Investing.com's estimate of 1.4 million barrels for the week ended Sept. 4.
On Thursday, the US sanctioned firms and individuals that it says are aiding Hezbollah and other Iranian proxies in the Middle East as Washington intensified its campaign to isolate Iran economically.
The latest package of sanctions by Treasury's Office of Foreign Assets Control hit entities and individuals in Iraq, Lebanon and Turkey that the US said supported Kata'ib Hezbollah, an Iraqi Shia paramilitary group under the command of the IRGC, and Hezbollah, a Lebanese Shia party.
On Wednesday, President Trump said that the US may hit Iran's Pickaxe Mountain, located near its heavily damaged Natanz uranium enrichment facility, warning that the Iranian conflict would likely last beyond the November midterm elections.
Fueling bullish sentiment, the US military destroyed five Iranian crude oil tankers in retaliation for Tehran's attempted attacks on an American warship. The US Central Command said it had redirected 96 commercial vessels to ensure compliance as of Sep. 10.
Iran, in response, targeted two US warships and eight oil tankers in the Persian Gulf, marking the biggest wave of tit-for-tat attacks on vessels in the Hormuz by both sides since the onset of the Middle East conflict in February.
Iran's Islamic Revolution Guards Corps said that Tehran will respond to any attack with a far greater number of strikes, noting that if the US hits two or three Iranian targets, its navy would respond by hitting 20 targets.
The risk is that escalation could lead to meaningful disruptions to Strait of Hormuz flows, ING strategists said in a note Thursday, adding that the market could tighten more sharply if ongoing escalation translates into disrupted oil flows.
On the demand side, China has reportedly stepped up purchases in recent weeks after months of subdued demand, boosting physical crude markets.
ING analysts said that while imports remain well below year-ago levels, they've started to recover from the lows seen in June; recent physical-market activity suggests this could continue.