Risks, prices, escalation: four major questions about oil in light of the US-Iran war

The main risk for the global stock market in the context of the US-Iran war is oil prices. Although Iran is not among the major oil suppliers, it nevertheless provides about 3% of the global volume and controls one of the most important arteries, the Strait of Hormuz, through which raw materials from the Persian Gulf countries are exported around the world.

What does the US operation mean, what can Iran respond with and what are the three scenarios for the oil market in this situation - these questions were answered by Barron's.

Iran's oil export system is centered on Kharq Island: the main terminal where Iranian crude is loaded into tankers is located there. Any shocks in the area would quickly affect export data and the global balance, Barron's says. In recent years, more than 2 million barrels a day have passed through the terminal, Bloomberg says.

Iran's oil exports remain significant despite sanctions. Iran is OPEC's fourth-largest oil producer - after Saudi Arabia, Iraq and the UAE. The country supplies 3.3-3.5 million barrels per day and controls about one-fifth of the world's crude flow through the Strait of Hormuz. Shipments from Iran have increased recently as Tehran has rushed to get as much crude out as possible before any possible U.S. action, Barron's found out from tanker tracking data. Saudi Arabia has also ramped up production and exports as a precautionary measure, Reuters wrote.

Iran's main oil production comes from the southwestern province of Khuzestan, located off the Persian Gulf. While the wells themselves are rarely an immediate problem, the region's refineries (refineries), pipelines and storage facilities are potentially bottlenecks because they are harder to repair quickly, Barron's noted. Wider shocks in the province could put production at risk even without a direct hit to the fields, the publication warned.

Energy infrastructure has been part of conflicts in the Middle East for decades. During the Iran-Iraq war in the 1980s, systematic strikes on tankers, export terminals and refineries in Khuzestan led to an outflow of up to 4 million bpd from the world market, although additional capacity from other countries, including Saudi Arabia, helped offset the losses, Barron's writes.

In 2019, drone attacks on Saudi refineries temporarily knocked 5.7 million barrels a day off the market and caused prices to spike. Saudi oil company Saudi Aramco then restored supplies in a matter of weeks, drawing on inventories and diverting crude from other refineries: thanks to this, quotes fell quickly, Barron's noted. Riyadh blamed Iran for the attacks.

For the global oil market, Iran's response could be more important than U.S. strikes, Barron's said. Even a small threat to shipping through the Strait of Hormuz could boost prices by raising insurance costs and slowing supplies, limiting supply even without reducing production. Bloomberg calls the Strait closure a "nightmare scenario" for global markets.

Iran has never resorted to a complete blockade of the strait. Such a move would hurt it itself: for example, it would cut off China, which provides more than 80 percent of Iran's oil exports (more than 90 percent, according to Bloomberg) and also buys crude from Saudi Arabia and other Gulf countries, Barron's said. On the other hand, Iran has repeatedly harassed, threatened and seized ships in the strait, especially in 2019, the publication noted. Analysts believe this is the tactic Iran is more likely to use, Bloomberg wrote.

Another risk involves Iran's proxies - armed militias in countries in the region, including the Houthis in Yemen, who could seriously disrupt supplies in the Red Sea in 2023.

Wall Street is considering three main scenarios, Barron's claims.

Basic. A limited U.S. strike does not interfere with shipping and oil supplies. Oil prices jump for a while, but then stabilize as the geopolitical risk premium declines. This scenario has played out several times in past geopolitical upheavals in which infrastructure was not affected, Barron's writes.

Medium. A more sustained increase in oil prices would require a significant loss of Iranian exports or attacks that affect regional infrastructure. A loss of 1 million barrels per day of exports from Iran for one year would translate into an increase in oil prices of about $8 per barrel, Barron's cited Goldman Sachs' estimate.

Bad. The long-term risk is a disruption to shipping through the Strait of Hormuz. OPEC+, with Saudi Arabia and Russia leading the way, has some additional capacity to partially offset the losses, Barron's argues. In particular, Saudi Aramco has two to three million bpd of reserves that it can quickly tap, the publication says. Saudi Arabia and the UAE could divert some supplies through pipelines that do not pass through the Strait of Hormuz, Bloomberg added.

Even so, in case of conflict expansion, oil prices may add $10-15 per barrel, Rystad Energy believes, while analysts at Tortoise Capital put the price above $100 per barrel in the "Hormuz scenario". For comparison: trading on Friday, February 27, Brent ended at $72.52 per barrel.

Oil markets are closed for the weekend, so there is no reaction of oil quotations to the military actions yet. Also at the time of publication of this material there was no information whether oil infrastructure was hit, notes Bloomberg.

On Saturday, there was an explosion on the Iranian island of Kharq, Bloomberg wrote with reference to the Iranian news agency Mehr. It, however, did not provide details and did not mention the oil terminal in any way, Bloomberg noted.

This article was AI-translated and verified by a human editor