The escalation of the conflict in the Middle East could cause oil prices to soar if Israel strikes Iran's "oil islands."
On Friday, October 4, Market Watch reported that Iran's Kharg Island oil terminal is highly likely to be targeted by Israel after Iran's missile attack on Israel. Gerard Filitti, a senior lawyer at the Lawfare Project, said the attack on the oil terminals on Kharg Island would have the most devastating impact as about 90 percent of Iran's exports pass through them, and if that happens, oil prices are expected to immediately soar by more than 10 percent and continue to rise.
According to the United States Energy Information Administration (EIA), most of Iran's crude oil is exported through Kharg Island, located in the northeastern Persian Gulf, known as Iran's "oil island."
Analysts say Iran's production of more than 3 million barrels per day could have a significant global impact if there is a supply disruption, which is closely linked to the manner and scale of Israel's retaliation.
As a result, WTI crude oil futures rose more than 5.69% on Thursday to a new daily high of $74.09 per barrel and closed up 5.15% at $73.71. Brent crude futures rose 4.98% to $77.58, rising above the 50-day moving average for the first time since July and the longest winning streak since August.
Brent crude has risen 8.5% for the week, and United States benchmark West Texas Intermediate has risen 8.1% for the week.
Tensions between Iran and Israel have also weighed on United States stock market benchmarks, with the Dow and S&P likely to close lower this week, but the S&P 500 energy sector is expected to rise more than 5% this week.
However, Simon Lack, co-manager of the Catalyst Energy Infrastructure Fund, pointed out that the oil market may have somewhat priced in the disruption of 1.5 million barrels per day of oil supply caused by Israel's attack on Iran's infrastructure.
OPEC is likely to increase production to cope with Iran's oil supply shortage
If Kharg Island were to be attacked, it would take months to repair the facility, even in the best of circumstances. Filitti said that while Iran has other terminals available for export, the distance and capacity of these terminals cannot replace the output of Kharg Island.
"A full-scale strike on Kharg Island would be devastating, as Iran's economy relies on oil exports for dollars and access to global markets."
Iran's crude oil production averaged 2.82 million b/d in 2023, with the country's oil fields accounting for about 12% of global oil reserves, according to S&P Global Commodity Insights.
This year, Iran's crude exports averaged 1.5 million barrels per day, almost half of its oil production. And Iran plans to increase its oil production capacity to 3.9 million barrels per day by 2025, up from 3.4 million barrels per day this year.
Rob Thummel, manager of the Tortoise Energy Infrastructure Total Return Fund, said other OPEC countries could quickly increase oil production if Iran's oil production and exports are disrupted to prevent a prolonged oil shortage.
Lack also said that if Iran's 1.5 million b/d oil supply is disrupted, OPEC members could produce about 500,000 b/d more, and United States could increase production by about 250,000 b/d. Therefore, "this can still be handled".
However, the transportation of oil by OPEC members through the Hormuz Strait also faces significant risks. The Hormuz Strait is one of the most important transportation bottlenecks for global oil supplies, with oil shipments through the Hormuz Strait averaging 21 million barrels per day in 2022, accounting for 21% of global oil consumption, according to the United States Energy Information Administration. According to Thummel:
"The problem is that the suppliers most likely to fill the gap in Iran's oil are Saudi Arabia or Kuwait, which needs to be transported through the Hormuz Strait. If oil shipments in the Hormuz Strait are disrupted, the world will face an even bigger problem. ”
The closure of the Hormuz Strait would lead to a temporary 20% reduction in global oil supply, sending oil prices "soaring in the short term" and possibly exceeding $100 a barrel. However, Thummel added that the United States "is very aware of the importance of the Hormuz Strait and may use all means to ensure that the strait remains open." ”
Israel could strike at Iran's facilities
Lack said Israel's threat to Iran's oil infrastructure is "more of a warning at the moment." However, if Israel decides to hit Iran oil and gas infrastructure, the Abadan refinery, Iraq which accounts for 17% of Iran's refining capacity and 13% of gasoline supply, could be a potential target.
"Attacking the refinery will hit Iran on multiple fronts, not only reducing its gasoline supply, but also freeing up crude oil supplies – which are already difficult for Iran to find buyers due to sanctions."
Simon Wong, a research analyst at Gabelli Funds, also said oil export facilities are not Israel's only potential targets in Iran, other possible targets include nuclear facilities, oil refineries and air defense facilities.
Wong added that if Israel strikes Iran's oil export facilities or refineries, oil prices could see an "immediate reaction" and rise. Oil prices could rise by $10 to $15 a barrel due to Middle East oil supply disruptions, "and what happens then depends on Iran's response."
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