Conflict in the Middle East has sent benchmark oil prices bouncing between the low $US80s a barrel and almost $US120 a barrel as traders tried to make sense of the impact of the closure of the Strait of Hormuz and what US President Donald Trump will do next.
Brent crude settled just under $US100 a barrel, by noon Thursday AEDT, after the International Energy Agency called on its 32 member countries, including Australia, to voluntarily release 400 million barrels of oil from their strategic reserves.
But CBA commodities analyst Vivek Dhar believes energy markets are not fully pricing in the disruption posed by the conflict.
"Our expectation that this crisis could last for months instead of weeks likely means that markets are underestimating the disruption to global energy markets," he said in a research note on Thursday.
Brent prices could surge as high as $US150 a barrel to force down demand among developing countries once supply shortfalls trickle through the pipeline, he said.
As a rule of thumb, every $US1 rise in the price of crude oil causes petrol prices to rise by about 1c/litre at the bowser, according to AMP chief economist Shane Oliver.
That means a $US50 increase in the Brent crude price to $US150 a barrel would translate to a 50c/l rise in unleaded.
But it could rise even higher if advanced economies needed to lift prices to reduce demand too.
LNG price spikes could also exceed those seen during the outbreak of the Ukraine war, which could flow through to higher energy prices in Australia.
"If the conflict is not resolved, oil and refined product prices are at risk of rising to levels not seen in history," Mr Dhar said.
He said that prospect would likely be intolerable for world governments and likely explains why markets are reluctant to countenance an extended closure of the Strait of Hormuz, which accounts for approximately 20 per cent of global oil and liquefied natural gas shipments.
But it is also difficult to see the US leaving without its strategic goals achieved.
"This is yet another example of geopolitics clashing with economics in this new era," Mr Dhar said.
"This adds a wildcard element to the outlook."
ANZ commodities analysts Daniel Hynes and Soni Kumari also said markets were underestimating how long the conflict could last.
A critical risk not priced in is the prospect of wells being shut in by interrupted power supply, insufficient staffing or unstable water access, which could cause temporary disruptions to become long-term supply losses, even if the conflict is resolved, they said.
Two foreign oil tankers were set ablaze off the coast of Iraq on Thursday morning, as Iran ramped up attacks in retaliation to US strikes.
"This appears to mark a direct and forceful Iranian response to the IEA's overnight announcement of a massive strategic reserve release aimed at cooling runaway prices," said IG market analyst Tony Sycamore.
West Texas Intermediate, another benchmark oil price, jumped 7.5 per cent from Wednesday's close, "underscoring how quickly supply-disruption fears can override co-ordinated stockpile drawdowns", Mr Sycamore said.
Energy Minister Chris Bowen was considering the IEA's request to release oil reserves, but stressed there was no immediate supply threat to Australia.
"Any action taken as part of a collective action will be in our national interest," he said in a statement.
"If we do join this action Australia will not be required to send fuel overseas but rather use its existing domestic reserves to take pressure out of the global market."
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