IEEJ： April ©IEEJ 2024
Special Bulletin
A Japanese Perspective on the International Energy Landscape (683)

April 3, 2024

WTI Hit 5-month High above $85 as Tensions Grew over IranKen Koyama, PhD
Chief Economist, Senior Managing Director
The Institute of Energy Economics, JapanOn April 1, an airstrike hit the Iranian embassy compound in Syria. Iranian media said Israel
carried out the attack, killing seven Iranian Revolutionary Guard officers and six civilians. Theairstrike has worsened the situation surrounding Iran and Israel, sparking regional tensions. Under
these circumstances, crude oil prices showed a sharp rise.
According to Iranian media reports, an Israeli missile attack on the Iranian embassy
compound in the Syrian capital of Damascus destroyed a building adjacent to the embassy, resulting
in the deaths of 13 people, including Iranian Revolutionary Guard officers and civilians. The
Revolutionary Guards said the seven casualties included senior officers such as a senior commanderin the elite Quds Force.
It is unusual for embassies and consulates-general protected under international law tobecome subject to direct military attacks. The Iranian side strongly reacted against the military attack.
On April 2, Iranian President Ebrahim Raisi hinted at retaliation against Israel. Although the Israeliside has not officially commented on its involvement in the incident, the military attack has led to asudden increase in tensions between Iran and Israel.
Amid the escalation of the Gaza crisis that began last October, tensions between Iran andIsrael had basically been growing. Since the very beginning of the crisis, Israel has sometimes
suggested that Iran might have been behind Hamas's surprise attack on Israel. As Israeli military
operations in Gaza have intensified since then, human casualties in Gaza have increased significantly.
While humanitarian crises in Gaza have become unprecedentedly serious, conflicts have not been
limited to Gaza but have continued to spread throughout the Middle East.
Hezbollah and Israel have had military clashes in border areas. While the Houthis in Yemen
have attacked Israeli-flagged tankers in the Red Sea and other areas, the United States and Britain haveconducted military attacks on the Houthis. As known well, Hamas, Hezbollah, and the Houthis haveties to Iran. It is believed that Israel has sensed Iran's presence behind the expansion of these conflicts.
In Iraq and Syria, various destabilizing actions by pro-Iranian forces have been observed. The feudand tensions between Iran and Israel have remained at a high level amid the Gaza crisis.
However, the level of tension has changed significantly due to the recent airstrike on theIranian embassy complex. In the future, the focus will be on the response by the Iranian side. Thereare concerns that the situation in the Middle East may suddenly be destabilized over Iran and Israel.
Although Iran has hinted at retaliation, there is a view that Iran is actually exercising self-restraint toavoid direct confrontation that could cause a major blow to itself. The international community as awhole, while condemning the airstrike on the embassy compound, has called for maximum restraint
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to prevent the tensions from escalating.
Even if there is no direct confrontation or large-scale war between Israel and Iran, however,
it is quite possible that pro-Iranian forces will attack or retaliate against Israel. When the situation
becomes tense and escalates military tensions significantly, there may be the possibility that theconflict will escalate in an unexpected or undesirable way due to misunderstanding or an unforeseencontingency.
That is why upward pressure has been exerted on oil prices in response to this incident. On
April 2, the closing price of the front-month futures contract for the benchmark Brent crude oil
increased by $1.50 per barrel from the previous day to $88.92/bbl, approaching close to $90/bbl.
Similarly, the key futures contract for the benchmark West Texas Intermediate crude oil rose by$1.44/bbl to $85.15/bbl. The Brent and WTI prices hit their respective highest levels in nearly fivemonths since late last October.
Crude oil prices bottomed out around the beginning of January this year and rose moderately
before staying in an extremely narrow range from February. They have resumed an upward trend since
mid-March. Behind the recent upward trend has been the gradual retreat of pessimism about the globaleconomy and signs of recovery in China, which are expected to bring about an increase in oil demand.
Amid the oil demand increase, market participants have grown aware that the international oil supplydemand balance may tighten under the current coordinated production reduction arrangement for theOPEC-plus group of oil-producing countries even if U.S. shale and other non-OPEC oil production
increases, contributing to the current upward trend.
Other important factors behind the upward trend of oil prices include geopolitical risks andtheir impacts on oil supply. Apart from the Middle East, Ukraine and Russia have stepped up attacks
on each other’s energy infrastructure as their war has remained at a stalemate. Particularly, Ukrainian
attacks on Russian oil refineries have affected oil supply, contributing to oil prices’ upward trend.
Under a dominant market view that the oil supply-demand balance will tighten, geopolitical risks’impacts on oil supply have exerted influence on oil prices.
It is not surprising from the perspective of market logic that the military attack on the Iranianembassy compound strains Iran-Israel relations and further boosts oil prices. In the past, geopoliticalrisks frequently accelerated crude oil price hikes when prices were rising due to the tightening supplydemand balance.
The problem would be future developments. The current increase in crude oil prices is areaction to the tense situation in Iran and the resulting geopolitical risks in the Middle East, as well as
market expectations that geopolitical risks will affect oil supply from the Middle East. This was exactly
what was observed in October last year, when the Gaza crisis broke out. When the Gaza crisis escalated
due to Israel's response to surprise attacks by Hamas, oil prices soared temporarily on expectations
that the conflict would affect Middle Eastern oil supply. It is still fresh in my memory that the mostserious scenario related to the expectations was that Iran would be involved in the conflict andseriously affect Middle Eastern oil supply.
Indeed, the latest situation is close to the beginning of the most serious scenario. It is only
natural that the world and oil market stakeholders will be of great interest in relevant future
developments. Another point to note is that crude oil prices are on an upward trend as market players
are aware of the possibility of a tighter supply-demand balance in the future. This is different from the2

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situation in which the Gaza crisis started amid oil prices’ downward trend that began in the second
half of September last year. We must pay attention to the future course of the international oil market
including supply and demand, geopolitical risks, and potential turbulence.
Contact: report@tky.ieej.or.jp
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http://eneken.ieej.or.jp/en/special_bulletin.html

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