Oil markets are on edge as tensions between Israel and Iran escalated this week. Oil prices rose as fears of an all-out war and actual disruption to oil supplies from the Middle East grew.
As the world awaits Israel’s response to Iran’s missile attack on Israel earlier this week, reports indicate that Israel may target some of Iran’s energy and oil infrastructure.
In the year following the Hamas attack on Israel in October 2023 that triggered the recent Middle East crisis, oil prices remained relatively calm, unlike similar recent geopolitical flare-ups.
That’s because OPEC, which is cutting oil production to “stabilize” the market, has an estimated 5 million barrels per day (bpd) of excess production capacity.
Analysts say OPEC, primarily Middle East producers Saudi Arabia and the United Arab Emirates (UAE), has enough spare capacity to offset potential supply losses from member Iran. That’s what I think.
However, if the conflict escalates to Iranian proxies targeting the oil infrastructure of Iran’s Middle East neighbors, or if Iran moves to cut off or restrict oil cargo traffic in the Strait of Hormuz, oil prices could rise to triple digits. Analysts say it could soar to record highs.
But most watchers and experts believe that the root of all oil shocks, the closure of the Strait of Hormuz, the world’s most important barrier for the oil trade, which handles about 20 million barrels per day (bpd), is unlikely. I think this is an event.
Nevertheless, markets are bracing for an actual disruption of supplies from the Middle East a year after the current conflict began.
Related: Oil market is completely focused on geopolitical risks
If Iranian infrastructure were targeted, the maximum damage to global oil supplies would be around 3.5 million barrels per day, of which around 1 million barrels per day would be exported primarily to China.
OPEC has more than 5 million barrels per day of spare oil production capacity, so such disruptions can easily be offset.
Amrita Sen, co-founder of consulting firm Energy Aspects, told Reuters: “Theoretically, even if all Iranian production were to be lost – which is not our base case – it would be a shock to OPEC+. “We have enough surplus capacity to make up for it.”
Analysts say Saudi Arabia’s oil production could increase by about 3 million barrels per day and the United Arab Emirates by 1.4 million barrels per day.
Consultancy FGE said in a note on Friday that markets are starting to price in some kind of attack by Israel on Iran’s oil infrastructure.
If there is a disruption in Iranian oil supplies, Brent crude prices are likely to exceed $80 per barrel, but otherwise could quickly fall to $70 per barrel, FGE said. are.
However, UBS analyst Giovanni Staunovo said Middle East producers’ excess capacity could be vulnerable to attack if the conflict escalates.
“In the event of a new attack on the energy infrastructure of regional countries, the effective available spare capacity could be significantly reduced,” Staunovo told Reuters.
Citigroup called the possibility of an Israeli attack on Iran’s main oil export facility on The Hague Island, where 90% of Iran’s exports are supplied, “low probability and high impact.”
However, this could be the trigger for Iran to try to disrupt traffic in the Strait of Hormuz, which would be a “tipping point for global oil markets and the global economy,” CityWatch said in a commentary published in MarketWatch. mentioned in.
Analysts at the bank said such an event could lead to a “substantial surge that far exceeds all-time highs.”
But some doubt the escalation will be that serious.
“Will the United States really allow Israel to blow up oil facilities on its adversary’s borders in an election year? Iran will really close the Strait of Hormuz and cut off its neighbors’ exports, as well as its own “Will it cut off the only notable resource source for “international income?” ” say PMV analysts.
“The extent of the war and its damage needs to be proven before oil market participants can shake off the overwhelming skepticism.”
Written by Tsvetana Paraskova, Oilprice.com
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