Concern has been rife in recent days over the possibility of Israel striking Iran’s energy sector, fueling fears that such an escalation in the Middle East could threaten global oil supplies.
Oil prices posted their biggest weekly gain in two years. Brent, the global oil benchmark, was trading above $78 a barrel on Friday, up more than 9% from last Friday, following a sharp four-day rally…
The rationale is clear: any Israeli attack that would hit Tehran’s 1.7 million bpd exports would have ramifications for global energy markets, while any Iranian retaliation targeting rival oil exporters in the Middle East would cause even more disruption.
Such an uncontrollable cycle of attacks would trigger a major price spike in the black gold, reigniting inflation and damaging the global economy weeks before the US election.
Despite these ominous estimates, however, analysts believe that there are some factors that demonstrate that the market has a certain resilience.
The Middle East and Israel’s response
Israel is discussing strikes against Iran’s oil and gas industry with its US allies as it considers a possible response to Tehran’s firing of 180 missiles at Israel this week, the Financial Times reports. .
It is recalled that last April, when Iran launched a missile and drone attack on Israel, Prime Minister Benjamin Netanyahu’s government responded by striking an Iranian air base. Neither side then sought further escalation.
This time, however, analysts predicted a more aggressive Israeli response, possibly targeting Iran’s key oil and gas industry.
The most important piece of the Islamic Republic’s energy infrastructure is the Kharg Island export facility
“I have a feeling the response will be a lot bigger than April,” Bob McNally, founder of Rapidan Energy Group and a former energy adviser to US President George W. Bush, told the FT.
Washington is expected to urge Israel to limit its strikes on Iran’s energy infrastructure. However, Israel sees the energy sector as “the ATM for the axis of resistance groups,” pointed out Helima Croft, chief commodities strategist at RBC Capital Markets and a former CIA analyst, referring to the network of Iranian-backed militant groups in region.
What locations could Israel hit in Iran?
The most important piece of the Islamic Republic’s energy infrastructure is the Kharg Island export facility, about 25 kilometers off Iran’s southern coast, which handles about 90% of crude shipments.
“There is a great risk to Kharg Island, which is essentially the nerve system of the Iranian oil sector,” Croft said.
Oil tankers that were near Kharg have left the area after Iran’s missile attack on Israel, said Samir Madani, CEO of TankerTrackers.com. He even underlined that Iran’s public tanker group “seems to fear an imminent attack from Israel”, adding that such an “overnight evacuation” has never been seen before.
During the Iran-Iraq war in the 1980s, Baghdad threatened to destroy the Kharg facility and targeted tankers leaving the terminal.
The other targets in the Middle East
Alternative, less important energy targets could include the Abadan refinery – which accounts for 17% of Iran’s refining capacity and 13% of its gasoline, according to Kpler analysts – and the Mahshahr oil terminal. Major pipelines and warehouses near Hormozgan could also be targeted.
An Israeli strike on Iran’s minor oil infrastructure could cause a temporary production loss of up to 450,000 b/d, Citi estimates. But an attack on Kharg would lead to a much larger, more widespread loss of up to 1.5 million b/d, or about 1.4% of global consumption.
In retaliation, Iran and its allies could try to internationalize the conflict by striking energy companies across the region
Hitting refineries instead of oil fields or export terminals may have less of an impact on the price of oil, or even drive it lower, as Iran would have more crude to sell abroad.
Iran’s response
In retaliation, Iran and its allies could try to internationalize the conflict by striking energy businesses across the region, including those of US companies or US allies in the Gulf. Any such moves, analysts warned, would trigger a major escalation.
“The danger is that this is no longer a limited conflict between Israel and Iran. There’s now a big arc of uncertainty,” said Daniel Yergin, a Pulitzer Prize-winning energy historian.
The FT recalls that in 2019, the US blamed Iran for a missile and drone attack on Saudi Arabia’s Khurais and Abqaiq oil facilities, which temporarily affected more than half of the kingdom’s crude production. Iran was also blamed for two sabotage attacks on tankers in the Gulf that year.
However, Riyadh’s improved relations with Tehran since then make it almost unlikely that Saudi Arabia will be “at the top of the Iranian retaliation list,” RBC’s Croft said. The two countries have been in constant contact since Hamas’ attack on Israel on October 7 sparked a wave of regional hostilities.
Iran could instead pressure various groups on its side to step up attacks on oil tankers, disrupting supplies. Yemen’s Houthi rebels have been attacking commercial ships in the Red Sea for months, saying the attacks are pro-Hamas and the Palestinians.
The extreme scenario for the Middle East
In a “more extreme” scenario, according to Jason Bordoff, head of the Center for Global Energy Policy at Columbia University, traffic through the Strait of Hormuz, the sea lane through which one in five barrels of global crude consumption per day passes, would be disrupted.
Any attempt to close the strait would affect Iran’s own exports, which analysts say makes it unlikely. “I think it’s a low-probability event that would be difficult to implement, even if Iran wanted to,” Bordov said.
The impact on oil prices
This week’s events rattled markets after a relative lull, with sluggish demand from China weighing on prices. Brent crude, the global benchmark, has risen 8% this week to nearly $78 a barrel.
If the conflict remains limited to airstrikes that do not hit energy infrastructure, Brent prices are unlikely to rise above $85 a barrel, Eurasia Group’s Henning Gloystein said.
But successful Israeli attacks on Iranian oil assets “will almost certainly push prices above $85 a barrel and possibly to $100,” he said. “Only if there were major Iranian retaliation that would seriously affect shipping through the Strait of Hormuz would Brent likely move much higher.”
Western nations also hold significant strategic reserves that could be used to limit price increases
Analysts at Citi said a successful attempt to breach the Strait of Hormuz, while unlikely, would push the price “well beyond previous record highs”, if only for a limited period. Brent’s all-time high was $147.50 a barrel in 2008.
Any jump in crude prices will ultimately increase the cost of gasoline, which could affect the US presidential election in November.
What could stabilize the market?
Two years of output cuts by OPEC+ producers — particularly Saudi Arabia and the United Arab Emirates — means the cartel has more than 5 million barrels per day of spare capacity, which could be returned if Iranian supply is suddenly cut. .
“This is a reassuring cushion to have in the market as we move into this very risky situation,” said Ann-Louise Hittle, vice president of oil markets at Wood Mackenzie.
Western nations also hold significant strategic reserves that could be used to limit price increases.
The U.S.-initiated release of strategic stockpiles after Russia’s invasion of Ukraine helped lower prices in 2022. But U.S. stockpiles are now at their lowest levels since the 1980s.
China, the destination for almost all of Iran’s oil, has built up its stockpiles, which may help smooth any supply disruptions.
SOURCE: ot.gr
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