Iran-Israel Tensions Drive Uncertainty In Oil Markets: Analysts Weigh In

Global oil markets have turned unstable due to the recent escalation of hostilities between Iran and Israel, which has the potential to disrupt supply chain networks with far-reaching consequences.

The ultimate impact on global oil balances and prices will largely depend on the degree of Israel's response and whether there are any disruptions to Iran's oil infrastructure, according to a Citi Research note. Brent crude is up 4.14% since the strike on Monday. Oil prices are at Rs $74.74 per barrel, up 1.14% as of 10:25 a.m.

Citi's assessment highlighted that if Israel were to target minor oil infrastructure—including downstream assets and export valves—the loss of output could range between 3 lakh to 4.5 lakh barrels per day. However, such actions would risk heightened geopolitical tensions, potentially affecting other strategic energy assets on both sides of the conflict.

Markets have so far taken a measured approach to the rising tensions, said Peter Cardillo, chief market economist at Spartan Capital Securities. "The escalation, which now includes Lebanon and potentially Iran, raises questions about whether we might see a full-scale conflict," he said. 

Cardillo also pointed out that much of the current response from both sides has been limited to minor retaliations, with the markets seemingly in a "wait-and-see" mode.

The key concern for the oil market is whether the conflict will spill over into a more extensive military engagement, which could potentially affect Iran's oil production. "If there were an outright war between Israel and Iran, it could engage the rest of the oil-producing nations in the region, potentially leading to a blockade that could send oil prices soaring, possibly even to $150 or higher," Cardillo said.

Peter McGuire, chief executive officer of XM Australia, also weighed in on the potential impact of the conflict on oil supplies. Iranian oil infrastructure stands vulnerable, he noted, particularly given its proximity to the Strait of Hormuz—a critical chokepoint for global oil shipments. 

"If there was an attack on Iranian fields, it would derail a lot of crude being exported globally," McGuire said. Market reactions could vary significantly based on the severity of the conflict, with oil prices potentially rising by $5, $10, or even $20 very quickly if the situation escalates, the expert cautioned.

Brent crude prices have also been affected by global economic cues and the potential for an increase in oil production by OPEC. Brent prices have risen about 4% since Monday, reaching $76.14 per barrel, but they remain capped at around $74 due to ongoing supply concerns.

Iranian crude oil production stands at approximately 3.4 million barrels per day, representing around 3% of global output. Israel's retaliatory actions could target Iran's refineries and associated infrastructure, potentially leading to temporary production shut-ins and domestic shortages.

As tensions continue to evolve, both Cardillo and McGuire agree that the key factors driving oil prices will be the degree of escalation in the conflict and the resulting impact on supply chains. 

"If the war factor continues to be contained without any threats of a blockade or an expanded OPEC response, then oil prices may remain contained," Cardillo said.