As tensions rise in the Middle East after Iran’s missile attack on Israel, the biggest worry for oil dealers is that the flow of crude oil could be slowed down. The Israel Defence Forces could focus on the Kharg Island export terminal if they want to attack Iran.
He said, “Kharg Island is where Iran loads most of its crude exports.” Smith is the head U.S. analyst at Kpler. “That would hurt crude exports the most as a goal.”
When asked by the press if he would back Israel striking Iran’s oil facilities, U.S. President Joe Biden said that talks were going on, which added to the rise during Thursday’s session.
The U.S. Energy Information Administration says that most of Iran’s crude oil exports go through Kharg Island, which is in the northeastern part of the Persian Gulf. It is sometimes called Iran’s “oil island.”
Leading lawyer at the Lawfare Project Gerard Filitti said that an attack on the oil terminal on Kharg Island would cause “the most disruption” because 90% of Iran’s world exports go through those terminals. He said that if that happens, oil prices will “immediately spike more than 10 percent and continue rising.”
“Even in the best circumstances,” Filitti said, fixing Kharg would take months. “Iran does have other terminals, but the distance and capacity of those terminals cannot replace the output from Kharg.” Filitti has experience in both oil and gas litigation.
A comprehensive strike on Kharg Island would be ‘devastating for the Iranian economy.’
Gerard Filitti, the Lawfare Project
He said that a full attack on Kharg Island “cannot be overstated.” It “would be devastating for Iran’s economy, which depends on oil exports to get dollars and trade with the rest of the world.”
S&P Global Commodity Insights says that Iran produced an average of 2.82 million barrels of oil per day in 2023. It is thought that 12% of the world’s oil reserves are in the country’s oil fields.
Iran has been exporting about 1.5 million barrels per day (bpd) of crude oil, which is about half of the oil it makes. Smith said that Iran wants to increase its oil production to 3.9 million bpd by 2025, up from 3.4 million bpd this year.
Smith said that Israel’s threat to hit Iran’s oil infrastructure is “at this point more of a warning than anything else.”
Still, Simon Lack, co-manager of the Catalyst Energy Infrastructure Fund MLXIX 1.09%, said that the oil market may have already priced in a situation where an Israeli attack on Iranian infrastructure cuts off 1.5 million barrels per day of supply.
He said that the Organisation of the Petroleum Exporting Countries could make about another 500,000 barrels per day, and the United States could make an extra 250,000 barrels per day. “So I think I can handle it.”
Read: What is oil shock? What OPEC+ could do to lessen the impact if the war in the Middle East hurts supply.
Smith from Kpler said that the Abadan refinery, which is close to the border with Iraq, could be a target for Israel if they wanted to attack Iran’s oil and gas facilities. He said that this plant is responsible for 17% of Iran’s petrol supply and 17% of its ability to refine oil.
Smith said, “Going after an oil refinery would hurt Iran in a number of ways. It would cut off its supply of petrol and make more crude oil available.” “Sanctions make it hard for Iran to find buyers for its oil.” A huge number of them go to China.
Still, oil buyers have pushed up the price of oil this week as tensions rise in the Middle East. Iran fired a missile at Israel after Israel began military operations in southern Lebanon as part of its new offensive against Hezbollah, a militant group backed by Iran.
On Thursday, the December contract for global benchmark Brent crude
BRN00 0.54%
On ICE Futures Europe, BRNZ24 0.55% rose $3.72, or 5%, to finish at $77.62 a barrel, which is 8.5% higher for the week. For November delivery, the U.S. benchmark West Texas Intermediate oil price is CL.1 0.50%. On the New York Mercantile Exchange, CLX24 0.49% rose $3.61, or almost 5.2%, to end the day at $73.71 a barrel, an 8.1% increase for the week.
Indexes of major U.S. stocks have been hurt by tensions between Iran and Israel. The Dow Jones Industrial Average DJIA -0.44% and the S&P 500 SPX -0.17% were both expected to end the week down, but the S&P 500 Energy sector SP500.10 1.58% was expected to rise more than 5%.
An analyst at Gabelli Funds named Simon Wong told MarketWatch that oil prices would rise quickly if Israel attacked Iranian oil refineries or sites that export oil.
He also said, “What happens next depends on how Iran responds.” A disruption in the flow of oil in the Middle East could cause global benchmark Brent crude prices to rise by $10 to $15 a barrel.
Wong said that Israel could go after more than just oil export sites in Iran. He also said that nuclear power plants, refineries, and air defence sites would be among the others.
A big worry is also the flow of oil through the Strait of Hormuz, a narrow waterway that neighbours Iran and is the most important transportation bottleneck for oil supplies around the world.
The EIA says that the waterway carried an average of 21 million barrels of oil per day in 2022, which was equal to 21% of the world’s oil usage.
Rob Thummel, who runs the Tortoise Energy Infrastructure Total Return Fund TORIX 0.95% at energy asset manager Tortoise, said, “If Iran’s oil production and exports were stopped, other OPEC countries could quickly make more oil to avoid a long-term oil shortage.”
“The problem is that Saudi Arabia or Kuwait are most likely to step in and fill in any gaps in Iran’s oil supplies,” he told MarketWatch. “The Strait of Hormuz would have to be crossed to get these barrels there.” If Iran could stop or slow down the flow of oil through the Strait of Hormuz, which neighbours Iran, the whole world would have a bigger problem.
Thummel said that if there was a long-term problem, like the strait closing and reducing the world’s oil supply by 20%, oil prices would “temporarily spike,” maybe going over $100 a barrel.
And remember that the U.S. “is very aware of how important the Strait of Hormuz is and is likely to do everything possible to keep it open,” Thummel said.
