President Joe Biden’s discussions with Israel about potentially striking Iranian oil facilities have raised concerns about escalating tensions in the Middle East and their potential impact on global oil markets. This comes in the wake of Iran’s missile attack on Israel, which was reportedly in retaliation for the killing of Hassan Nasrallah, the leader of Hezbollah. The mere possibility of such strikes has caused oil prices to surge:
• West Texas Intermediate crude front-month hit a high of $73.95 today, setting at $73.71.
• Brent crude, the global benchmark, increased 5.15% to $77.07 per barrel. A more significant concern is the potential Iranian response to such strikes, which could include attempts to close the Strait of Hormuz:
• The Strait of Hormuz is the world’s most important oil transit chokepoint.
• In 2022, oil flow through the strait averaged 21 million barrels per day, equivalent to about 21% of global petroleum liquids consumption.
• Approximately 82% of the crude oil and condensate that moved through the Strait of Hormuz went to Asian markets in 2022. If Iran were to attempt closing the Strait of Hormuz in response to Israeli strikes:
• A seven-day interruption in shipments could lead to a jump in per-barrel oil prices by as much as $28, or about 67 cents per gallon, analysts advise.
• Some analysts suggest that severe damage to Iran’s energy infrastructure could potentially drive oil prices to $100 per barrel or more. Despite these concerns, several factors could help mitigate the impact on global oil markets:
• OPEC+ spare capacity: OPEC+ currently has significant spare crude capacity that could help offset potential shortages.
• Diversified global supply: Increased oil production from countries like the United States, Brazil, and others has diversified the global fuel supply, reducing reliance on Middle East shipments.
• Strategic Petroleum Reserves: Both the U.S. and China have significant strategic petroleum reserves that could be tapped to stabilize markets.
• Alternative routes: Saudi Arabia and the United Arab Emirates have operating pipelines that can bypass the Strait of Hormuz, providing some alternative export routes.
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