The Iranian flag above the new Phase 3 facility at the Persian Gulf Star gas condensate refinery in Bandar Abbas, Iran, in 2019.
Ali Mohammadi | Bloomberg Getty Images
Oil markets faced a rude awakening this week after Iran launched a large-scale ballistic missile attack on Israel, quickly sending oil prices over 5% higher on Tuesday after a period of sleepy trading.
For months, traders have largely dismissed the risk of supply disruptions in the Middle East. However, bearish sentiment swept the market in September as investors increasingly feared a surplus next year due to reduced demand in China and increased production from OPEC+.
The escalating war in the Middle East, however, has reached a new boiling point as Israel vows a “painful” response to Iran’s attack. Prime Minister Benjamin Netanyahu’s government could target the Islamic Republic’s oil infrastructure in retaliation, geopolitical and crude oil market analysts say.
“There’s a lot of complacency about this war,” Helima Croft, head of global commodities strategy at RBC Capital Markets, said Tuesday on CNBC’s “The Exchange” shortly after the attack. “We have to think about a scenario where there is a risk to Iran’s oil supply.”
Israel can also take Yahoo in Iran’s nuclear facilities, but the building is hardened, making it difficult to destroy, said retired US Army Col. Jack Jacobs. An attack on the facility could trigger a larger ballistic missile attack by Iran that would be difficult to defend against, he said.
“What’s on the table now and more likely is an attack on an oil facility,” Jacobs said Wednesday morning on CNBC’s “Squawk Box.”
OPEC member Iran is producing at a five-year high of more than 3 million barrels per day, Croft said. US intelligence in the past has highlighted potential risks to Iran’s Kharg Island oil terminal, through which 90% of the country’s crude exports pass, according to a Tuesday note from RBC Capital Markets.
“The next step in this retaliatory spiral may involve oil — through reducing Iran’s oil capacity or Iranian proxies attacking oil and gas shipments from the Persian Gulf,” Piper Sandler analysts told clients in a research note Wednesday.
The impact on the oil market will depend on the damage done to Iran’s crude exports and how things escalate from there, said Bob McNally, president of Rapidan Energy. If Iran’s oil exports of about 1.8 million bpd were taken offline, prices would rise by at least $5 per barrel, McNally said.
Iran, in turn, will retaliate by threatening 13 million bpd of crude oil and 5 million bpd of products produced and flowing through the Persian Gulf, McNally said. An escalation on this scale could send oil prices higher by an additional $10 per barrel, the analyst said.
“It’s a dangerous time for the oil market right now,” Andy Critchlow, head of EMEA news at S&P Global Commodity Insights, told CNBC’s “Street Signs Europe” Wednesday. “It’s difficult for anyone in the market to gauge direction when looking at the amount of geopolitical risk involved.”
OPEC, however, has 5.6 million bpd of spare capacity that can be brought back to the market with Saudi Arabia keen to return as much of the oil back to the market as possible, Critchlow said.
“Any disruption to Iran’s supply to the international market I think can be made up for with OPEC’s spare capacity and now there is still oil,” the analyst said.
McNally, however, said this oil does not mean much if there is a major disturbance in the Persian Gulf. “The spare capacity will not help because it is mostly bottled up in the Strait of Hormuz,” the analyst said.
