After Iran attacked Israel with nearly 200 missiles late on Tuesday, and the latter vowed to retaliate, oil prices surged upwards from their recent lows on heightened tension in the Middle East.
At 7:50am EDT on Wednesday, the Brent front-month futures contract was trading at $75.63 per barrel up $2.07 or 2.80% while the West Texas Intermediate was up $2.21 or 3.16% to $72.04 per barrel.
Iran said it had attacked Israel in response to its “aggressive acts,” including the killing of Hezbollah leader Hassan Nasrallah in Lebanon. In response, Israeli Prime Minister Benjamin Netanyahu said Iran had “made a big mistake and will pay for it”.
This may be a coded warning that Israel will go after in Iran’s oil facilities. According to industry data aggregator and research firm Kpler, Iran exported 1.194 million barrels per day of crude oil and gas condensate in spring 2023, a figure that rose to a five-year high of 1.65 million bpd in the first five months of 2024.
So, the industry is an obvious target for Israel, should it choose to retaliate, as various media outlets (e.g. Axios) have speculated. The extent of the market impact depends on the chosen targets and scale of a possible attack. In this respect, four sites of strategic importance come to mind.
The first of these is the Kharg Oil Terminal, situated on Kharg Island, 15 miles off Iran’s northwestern coast. It handles over 90% of the country’s global crude oil exports.
The second could be a cluster of oil terminals in the Southern province of Hormozgan. It also has two free trade zones on Kish and Qeshm Islands. Kish is also home of the Iranian oil bourse — the only exchange of its kind that does not trade oil and derivatives in U.S. dollars.
The third, and more domestically focused site, is the Abadan Refinery located across Shatt Al-Arab River on the border between Iraq and Iran. Reliable up-to-date data on the refinery’s production capacity is hard to find. But estimates and regional media sources (e.g. Financial Tribune) suggest it could be producing around 400,000 bpd. As Iran’s oldest processing facility — originally built in 1909 by Anglo-Persian oil (which later became BP) — it services around 25% of Iran’s domestic fuel demand.
Mahshahr Oil Terminal, an oil port located on the Khor Musa Channel, is the fourth site. It stores and shifts products from the Abadan Refinery, and serves as an engineering and jetty construction hub for Iran.
Saddam’s War Playbook
All these sites were routinely targeted by Iraqi dictator Saddam Hussein during the Iran-Iraq war (1980-88) and severely crippled the Iranian economy. It makes them obvious potential targets for Israel and will likely have an impact on the global oil market to varying degrees.
The most potentially devastating Israeli strike carrying global implications would be an attack on the Kharg Oil Terminal. It will likely result in a short-term crude price spike of around 5%, as it carries the potential for international disruption, primarily to Iran’s exports to China — the world’s largest importer of oil.
On the other hand, an attack on Hormozgan oil facilities would likely be more about symbolism given that many of the province’s terminals are largely unused. This is down to creaking infrastructure, lack of investment and years of Western sanctions on Iranian oil. Israel may attack the province to send a message.
Should the Abadan Refinery be targeted, it may cripple Iran’s domestic fuel supply chain. It being knocked offline perhaps does not carry any significant international implications. However, should the nearby Mahshahr Oil Terminal be subjected to an Israeli strike, regional crude and product supply chain issues will likely arise.
Elevated Risk Premiums Unlikely To Hold
If these real-time geopolitical developments were clouding the market a decade ago, most observers would factor in a double-digit near-term uptick in oil prices. However, despite all what the current year has thrown at the oil market, prices – using Brent as a benchmark – are still nearly $10 lower than October last year, and hit lows last seen in 2021 earlier this month.
That’s because unlike a decade ago, oil production outside the Middle East has steadily risen. The U.S. is currently the world’s largest crude oil producer. Production in Brazil, Canada, Guyana and Norway is also at record levels, according to the International Energy Agency. Furthermore, the Saudis are holding back substantial spare capacity.
All of this is occurring at a time of uncertain oil demand and global macroeconomic challenges. Even the Organization of Petroleum Exporting Countries — considered to be among the more bullish demand forecasters out in the market — now expects lower demand growth both in 2024 and 2025.
As does the IEA, though both continue to offer vastly divergent oil demand growth forecasts for 2024 of less than 1 million bpd in the agency’s case, and just over 2 million bpd in OPEC’s case.
So while geopolitical tension in the Middle East may not be new, today’s oil market doesn’t even remotely resemble that of the last decade. Always remember that when oil futures reflect a geopolitical “risk premium,” it is based on fears of a potentially imminent loss of supply as is the case at the moment.
Once the loss does happen — say following a potential Israeli attack — it morphs from being a risk to market reality and corrective mechanisms kick in both on the supply as well as pricing side. That’s unless there is further loss of supply which is the unknown variable for the market.
Ultimately, elevated tension between Iran and Israel and the wider conflict in Gaza and Lebanon is something the oil market could well do without, but is one that it currently appears capable of handling with all eyes now on what Israel will do next.