Changan Futures Fan Lei: Conflict Sustained in Fourth Week, Oil Prices Focus on Three Factors

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Recently, crude oil prices have continued to fluctuate widely, reaching new highs since the Russia-Ukraine conflict. As the US-Iran conflict officially enters its fourth week this week, the conflict has evolved from a single military strike into a systemic risk event affecting energy facilities, maritime routes, and regional political structures. The main factors fueling the recent escalation are twofold: First, last week, Iranian political leaders faced targeted killings again. On March 17, the Secretary of Iran’s Supreme National Security Council was assassinated; on March 18, Iran’s Intelligence Minister was killed during military operations; Basij militia commander was also killed at the same time; on March 20, a spokesperson for Iran’s Islamic Revolutionary Guard Corps was attacked and killed. These targeted killings last week triggered a strong Iranian response, including missile and drone strikes on targets inside Israel, an announcement to expand the escort range of the Strait of Hormuz to the entire Gulf of Oman, and a public warning that “any third-party military intervention will trigger a full-scale counterattack.”

Second, last week’s conflict finally crossed the market’s expected “red line” under Israeli action. On March 18, Israel launched strikes against facilities related to Iran’s South Pars gas field, marking a key turning point in the conflict. Although former President Trump later claimed he was unaware of this, Iran announced that its retaliation would extend to Gulf countries, specifically targeting oil and gas facilities in Saudi Arabia, the UAE, and Qatar. The attacked South Pars gas field, while not causing significant capacity loss, has symbolic significance beyond physical damage—it accounts for about 40% of Iran’s natural gas processing capacity and is shared with Qatar, making it one of the world’s largest gas fields. This attack marks the first time energy infrastructure has been directly targeted in the conflict, breaking the long-standing implicit rule of “energy facility exemption.” Subsequently, after Saudi Arabia, the UAE, Kuwait, and Qatar announced multiple energy facilities were attacked, Israel officially stated that future actions would no longer involve energy infrastructure and claimed to have destroyed Iran’s nuclear fuel production and missile manufacturing facilities.

The occurrence of these two major events last week undoubtedly accelerated the escalation of geopolitical tensions. The first sign indicates that the security of energy transportation routes has shifted from unilateral escort to multilateral institutional arrangements, pushing up the risk premium for the Strait of Hormuz by about $5 per barrel. The second, by expanding the geographic scope of the conflict, has spilled over supply concerns from Iran to the entire Gulf oil-producing countries, causing the Brent forward curve to steepen by 18 basis points in a week. This not only exacerbates regional security fragmentation but also significantly raises market pricing of long-term risks associated with “non-direct but ongoing consumption” conflicts.

Meanwhile, the situation regarding the blockade of the Strait of Hormuz has evolved from a US-Iran military confrontation to a multidimensional diplomatic game on a global scale. First, on March 20, the US announced the launch of the “Middle East Energy Corridor Security Initiative,” forming a routine escort fleet with the UK and Australia, incorporating the Strait of Hormuz and the Strait of Mandeb into a joint deterrence framework for the first time. Second, the US called on G7 countries to jointly escort ships passing through the strait, but progress appears limited. Besides the UK and Australia, France and Japan have not directly deployed military forces to control the strait, reflecting complex political and economic considerations. Third, Iran continues to accelerate the “Arc of Resistance” military coordination mechanism, with Hezbollah and Yemen’s Houthi forces increasing attacks in the Red Sea and the Gulf of Aden. The Houthis even announced plans to consider blocking the Strait of Mandeb, which could lead to disruptions not only in the Persian Gulf but also in the Red Sea–Suez Canal route.

On the financial front, last week’s major central bank meetings concluded with the Fed holding steady. With recent geopolitical developments and Powell’s comments on oil prices potentially impacting core inflation, the market has largely ceased betting on rate cuts this year and has even re-priced for rate hikes. Besides the Fed, most global central banks paused or adopted hawkish stances last week. Although the US economy’s current data—such as inflation, GDP growth, and Treasury spreads—do not support aggressive rate hikes, upcoming US CPI, PMI, and labor market data could intensify market expectations for rate increases.

In terms of commodities, recent high geopolitical volatility has weakened the traditional supply-driven logic of oil price movements. The market now mainly considers how production cuts driven by geopolitical tensions will impact prices. Our previous report indicated that a reduction of 1 million barrels per day in Middle Eastern output could add about $5 per barrel to international oil prices. Currently, the actual reduction is around 8 million barrels per day, implying a premium of nearly $40 per barrel, consistent with Brent hovering around $110. Additionally, supply-side changes show that Middle Eastern production has indeed decreased, but the release of strategic reserves by major economies has not fully materialized, and even with recent releases by G7 countries, the scale is unlikely to significantly impact prices in the short term. The regional focus of reserve releases—mainly in Europe and North America—limits their effect on Asia-Pacific markets, diminishing their marginal impact on oil prices.

Furthermore, market data from S&P Global indicates that the Dubai crude spot price for May loading reached a record $157.66 per barrel on March 17, and Oman crude also hit $155, far above the current WTI and Brent prices. This discrepancy mainly results from Brent and WTI being priced based on Atlantic and North American markets, while Dubai and Oman prices reflect Middle Eastern regional prices, heavily influenced by regional geopolitical tensions, reduced shipping capacity, and production cuts. This situation underscores the tightness of Middle Eastern crude supplies and suggests that the market has not succumbed to excessive panic.

In summary, the key factor influencing oil prices remains the geopolitical situation in the Middle East. International oil prices have again reached the second-highest level since the Russia-Ukraine conflict, while domestic SC crude oil prices are at the same high as the conflict peak. As the US-Iran conflict enters its fourth week, the market’s focus should be on: 1) the actual transit capacity of the Strait of Hormuz, including tracking shipping data and US actions around Halek Island this week; 2) Iran and its proxy forces’ counterattacks in the Middle East, especially whether energy facilities will be targeted again; 3) US military deployments, whether the previously reported troop movements or Trump’s mention of ending the conflict within 4-6 weeks. These issues are unlikely to have clear answers in the short term, implying ongoing high volatility and uncertainty in oil prices. Short-term trading strategies should focus on swing trading in energy-related assets, with a bias toward long positions and out-of-the-money call options. For reference only.

Author Profile:

Fan Lei, Analyst at Chang’an Futures, Master’s degree, Futures Investment Consulting License: Z0021225. With solid theoretical background and international perspective, he has been dedicated to macroeconomic and crude oil-related chemical sector and options research since entering the futures industry. Skilled in fundamental analysis, policy-driven frameworks, and market judgment, he strives to create value for clients with professionalism and sincerity.