Oil prices climbed in early Asian trading on Monday as Israeli troops moved further into Lebanon over the weekend and the U.S. hit targets in Iran, adding fuel to fears that the broader Middle East conflict is moving toward escalation rather than a peace deal.
At the time of writing, West Texas Intermediate crude was up 3.27% at $90.22 per barrel, while Brent crude had risen 3.36% to trade at $94.18 per barrel.
The U.S. strikes on Iran were confirmed by U.S. Central Command, which described them as “self-defense strikes on Iranian radar and command and control sites for drones”. This operation was reportedly carried out after Iran had shot down a U.S. MQ-1 drone, which CentCom says was operating over international waters.
In Lebanon, the latest escalation came after Israeli troops crossed the Litani River, having declared all areas south of the Zahrani River a combat zone. Israel then captured Beaufort Castle in southern Lebanon, a strategically important hilltop fortress, before Prime Minister Netanyahu ordered the Israeli military to deepen and expand operations against Hezbollah.
U.S.-hosted talks between Israeli and Lebanese officials in Washington on Friday were described as “productive” by U.S. officials but now appear to hang in the balance.
Iranian officials have made it clear that Lebanon will be central to any long-term peace deal with the U.S., which is why escalation there adds to upside risk for oil markets that have seen supply strangled since the closure of the Strait of Hormuz by Iran.
On Friday, President Trump said his administration would soon make a “final determination” on whether to extend the existing ceasefire framework with Iran, but didn’t give any timeline for that decision. Repeated reports of the two sides nearing an agreement to extend the ceasefire and reopen the Strait of Hormuz caused oil prices to plunge last week, but no agreement has been signed.
Beyond the fighting in Lebanon, data released over the weekend showed Chinese factory activity remained sluggish, reinforcing concerns that the world’s second-largest economy is struggling with slowing exports and persistent deflationary pressures.
Under normal circumstances, softer Chinese demand expectations would weigh on oil prices, but the supply risk in the Middle East will remain the dominant driver for oil prices until a long-term solution is found.
By Josh Owens for Oilprice.com
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