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Oil Rally Builds as ‘Staggering’ Middle East War Jolts Energy

(Bloomberg) -- Oil extended gains as the US and Israel stepped up their war against Iran, while Tehran vowed a full closure of the Strait of Hormuz and hit the American embassy in Riyadh with drones.

Global benchmark Brent rose above $80 a barrel, after spiking about 7% on Monday, while West Texas Intermediate was near $73. President Donald Trump said the US would do “whatever it takes,” and Secretary of State Marco Rubio told reporters the military campaign was set to intensify.

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The US embassy in the Saudi capital came under attack by two drones, causing a “limited fire and minor material damage,” according to Saudi Arabia’s Ministry of Defense. Earlier, the US State Department urged all American citizens to leave the Middle East given “serious safety risks.”

Ebrahim Jabbari, an adviser to Iran’s Islamic Revolutionary Guard Corps commander, told state television that forces “will set fire to any ship attempting to pass through” the Strait of Hormuz. Jabbari is described by local media as a senior adviser to IRGC’s head, not an active commander.

Global energy markets have been upended by the war, which erupted on Saturday and then spread across the oil-rich Middle East as Iran sought to retaliate against Israel and states hosting US forces. Oil prices have spiked, along with natural gas and petroleum products such as diesel, potentially fueling a wave of inflation across the world. Coal has also jumped.

“With the Strait of Hormuz still inactive, the clock is ticking,” JPMorgan Chase & Co. analysts including Natasha Kaneva said in a note, flagging scope for some Persian Gulf producers to cut output within weeks if storage fills.

For now, gains in prices “remain contained — despite the staggering geographic scope of the conflict and growing proximity to energy infrastructure — reflecting that a substantial risk premium is already priced,” they added.

China — the world’s largest oil importer — called on all sides in the war to ensure the safe passage of ships through the Strait of Hormuz. The country “urges all parties to immediately cease military operations, avoid escalating tensions and safeguard the safety of navigation,” Foreign Ministry spokeswoman Mao Ning said at a regular briefing in Beijing on Tuesday.

Oil’s metrics point to growing near-term tightness. Brent’s prompt spread — the difference between its two cloest contracts — widened to $1.93 a barrel in backwardation, a bullish pattern. A week ago, the gap was 19 cents. Further out along the curve, the difference between Brent contracts for this coming December and the same month in 2027 ballooned to about $3.80.

Energy infrastructure has been in the cross-hairs. On Monday, Saudi Aramco halted operations at its Ras Tanura refinery after a drone strike in the area. Qatar shut liquefied natural gas production at the world’s largest export facility after it was targeted in an Iranian attack.

Tanker traffic through the Strait of Hormuz has all but ground to a halt given the risks. The chokepoint off the coast of Iran handles a fifth of the world’s oil and a similar portion of liquefied natural gas. Shipments transiting the waterway usually come from Iran, as well as other producers in the region, including Saudi Arabia, en route to global markets.

The impact of the conflict has ripped through freight markets. The cost of hauling crude oil from the Middle East to China soared to the highest level on record on Monday, with earnings on the industry’s benchmark route surging to $424,000 a day, according to data from the Baltic Exchange.

Speaking on national television, Iranian Foreign Minister Abbas Araghchi said Tehran had no quarrel with neighboring countries, but was “taking on the American soldiers stationed there.” The US has said it would welcome regime change in Tehran, encouraging local people to overthrow the government.

Israeli forces continued attacks against Tehran, and carried out more airstrikes in Lebanon targeting Iranian proxy Hezbollah. In energy infrastructure, the Leviathan natural gas project has suspended production.

Secretary of State Rubio said the focus was to destroy Iran’s Navy and drones, as well as its ballistic-missile program, which was being used as a shield to fuel its nuclear ambitions. A US plan to mitigate energy costs would begin to be implemented on Tuesday, he added.

Separately, a person familiar with the situation said the Trump administration had no immediate plan to tap the nation’s emergency crude holdings. Any move to release oil from Strategic Petroleum Reserve would likely be coordinated with nations that belong to the International Energy Agency.

On the diplomatic front, the United Arab Emirates and Qatar are privately lobbying allies to help them persuade President Trump to reach for a so-called off-ramp that would keep US military operations against Iran short, according to people familiar with the matter.

Should the effective closure of the Strait of Hormuz persist, with tankers unable to shift cargoes, there’s a risk that Persian Gulf producers will be forced to fill local storage capacity, then consider shutting-in wells. JPMorgan has estimated such a threshold may be reached after about 25 days.

“The war is now entering a dangerous phase,” ANZ Group Holdings Ltd. analysts including Daniel Hynes said in a note. “The longer the conflict persists, the greater the impact on the oil market it will have.”