Crude oil prices have risen 8% since Monday to around $77 per barrel due to escalating tensions between Iran and Israel. The increase followed Iran's missile attack on Israel, following which, Prime Minister Benjamin Netanyahu vowed "significant retaliation within days".
Reports indicate Israel may target Iranian economic facilities, including refineries and power plants. Despite previous reassurances from traders, such an attack could have serious implications for global oil supply.
Peter McGuire, chief executive officer of XM Australia, highlighted how an attack of this nature would have a "massive impact on oil prices". He noted concerns about Iranian supply and potential shipping disruptions in the Persian Gulf, especially through the strategic Strait of Hormuz.
Iran's Importance In Global Oil Supply
OPEC data shows that Iran's crude oil production is currently around 3.4 million barrels per day, alongside 0.7 million barrels per day of condensate production, primarily exported to Asia, according to Citi.
As per International Energy Agency data, Iran is expected to have 7.6% share within OPEC+ total oil production in 2024, and currently maintains a 3.2% market share.
Level Of Impact: Will The US Engage?
A key factor is the US' engagement in the situation. President Joe Biden has indicated ongoing discussions with Israel regarding potential strikes on Iran’s oil infrastructure. Vandana Hari, chief executive officer of Vandana Insights believes it's "highly unlikely that the US will support Israel in principal, let alone tactically, attack Iranian oil facilities". Washington will continue to do everything in its power to avoid triggering an all-out Middle East war, she said.
McGuire added that if the US becomes involved, then one needs to appreciate Iran’s allies, which include Russia and China.
Level Of Impact
If Israel targets minor oil infrastructure, such as storage facilities, the output loss could be minor and temporary, estimated at 300,000 to 450,000 barrels per day, according to Citi. However, this may escalate geopolitical tensions.
Conversely, striking major export facilities handling over 90% of Iranian oil could lead to a significant and prolonged loss of up to 1.5 million b/d. Citi calls this a "low-probability, high-impact risk" that could push Iran to consider closing the Strait of Hormuz.
Importance Of Strait Of Hormuz
The Strait of Hormuz, a crucial waterway in the Persian Gulf, connects to the Arabian Sea and handles over 20 million barrels per day, accounting for more than 20% of the world's petroleum supply. About 80% of this oil flows to Asian markets like India, China, Japan, and South Korea. Any closure of the Strait would significantly impact the global oil market and economy, Citi said.
While Iran doesn’t have exclusive control over the Strait, its strategic location and strong naval presence give it considerable influence. Iran has threatened to close the strait, raising concerns about potential disruptions to global oil supply.
Alternative Routes
Saudi Arabia and the UAE can divert a significant portion of their Arab Gulf exports via pipelines, which would help mitigate the impact of any closure or major shipping disruptions, Citi said.
In contrast, Iraq, Kuwait, Qatar, and Bahrain lack alternative export routes, making them more vulnerable to challenges in the event of significant disruptions in the Strait of Hormuz.
Enough Supply In the Market?
The Organization of the Petroleum Exporting Countries is currently withholding 5.6 million barrels of oil per day due to voluntary production cuts initiated in 2022. OPEC plans to begin increasing supply in December, which could help stabilise global oil supply during disruptions.
Meanwhile, the US is producing about 13.4 million barrels per day, expected to rise to a record 13.49 million barrels by the end of 2024, according to US government data.
However, McGuire notes that for OPEC's increased supply to be effective, it must be transported without disruptions. Another black swan event to keep in mind is the US' Strategic Petroleum Reserve, which would need to be increased immediately. This would create significant stress on the already tight global supply, McGuire said.
Ultimate Impact On Oil Prices
According to Citi's commodities team, the ultimate impact on global oil balances and prices will depend on the extent of Israel’s response and any physical disruptions to Iranian oil.
Citi suggests that a complete closure of the Strait of Hormuz would throw global oil markets into uncharted territory, likely causing prices to spike sharply above previous highs. However, such a surge would be temporary as the market adapts with alternative export routes, the brokerage said.
Prices could ramp up dramatically if some or all of the possible factors were to materialise over the coming weeks, according to McGuire.
"There are a myriad of worst-case scenarios, which can deliver varying degrees of supply shock. But it is important to assess the risk of those realistically rather than as a knee-jerk reaction. The situation being defused rather than worsening is our base case scenario," Hari said.
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