The global oil market experienced a dramatic shift this week following Iran’s large-scale ballistic missile attack against Israel, briefly causing crude prices to surge by over 5% on Tuesday. This sudden rise came after a prolonged period of stagnant trading, with market sentiment primarily shaped by expectations of an oversupply in 2024 due to weak demand from China and increased production from OPEC+.
For months, traders downplayed the possibility of supply disruptions in the Middle East. However, the expanding conflict between Israel and Iran has now reached a boiling point, with Israel vowing a “painful” retaliation. Experts suggest that Israel could target Iran’s vital oil infrastructure, which would have significant repercussions on global oil markets.
Helima Croft, head of global commodity strategy at RBC Capital Markets, voiced concerns over the complacency surrounding the war. “We do need to think about a scenario where Iranian oil supplies are at risk,” she said during an appearance on CNBC’s “The Exchange” shortly after the missile attack.
Retired U.S. Army Colonel Jack Jacobs also warned of the potential for escalation, noting that while Israel could target Iran’s nuclear facilities, these are heavily fortified. Instead, a strike on oil facilities, including the Kharg Island terminals, which handle 90% of Iran’s crude exports, is seen as a more likely target. Such a move could prompt a retaliatory strike by Iran and further destabilize the region.
OPEC member Iran is currently producing oil at a five-year high, exceeding 3 million barrels per day. According to U.S. intelligence and reports from RBC Capital Markets, any damage to these facilities could have a devastating impact on global oil prices. Analysts at Piper Sandler suggested that the next phase of the conflict could see attacks on oil and gas shipping from the Persian Gulf or a direct hit on Iran’s oil capacity.
The extent of the damage to Iranian crude exports will dictate the market’s response, said Bob McNally, president of Rapidan Energy. If Iran’s 1.8 million barrels per day of crude exports are halted, prices could jump by at least $5 per barrel. In a worst-case scenario, McNally added, oil prices could rise by $10 per barrel or more if Iran retaliates by threatening the 13 million barrels per day of crude and 5 million barrels per day of refined products that flow through the Persian Gulf.
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“These are dangerous times for oil markets,” Andy Critchlow, EMEA head of news at S&P Global Commodity Insights, told CNBC. The mounting geopolitical risks make it difficult to predict the direction of the market, with oil prices hanging in the balance.
Despite these concerns, OPEC has a buffer of 5.6 million barrels per day in spare capacity, which Saudi Arabia is eager to deploy to stabilize the market. However, McNally cautioned that even with spare capacity, any major disruption in the Persian Gulf would have severe consequences, as most of this excess oil is “bottled up inside the Strait of Hormuz.”
As tensions in the Middle East continue to rise, oil markets remain on edge, with fears that the conflict could escalate further, creating shockwaves across the global energy landscape.
