Where oil prices may go next, based on a history of Middle East conflicts
The spike in oil prices may soon stall and reverse course if the Israel-Iran conflict does not widen, according to historical data examined by TD Securities. Daniel Ghali, a senior commodity strategist at the firm, said in a note to clients that the initial moves in oil markets already put this week's developments on par with the average comparable event since the 1980s. "Historically, geopolitical risks typically faded within one month, and completely evaporated within six months, in line with subsequent macroeconomic headwinds and deployment of spare capacity. Expanded wars (incl. involving USA) have a more significant impact," Ghali said. In 14 similar events since 1948 identified by TD, it took an average of 2.36 months for oil prices to peak, with an average increase of 17%. However, that includes a 135% spike around the Yom Kippur War in 1973. Focusing only on events after 1980 shows a smaller average advance for oil prices. By comparison, West Texas Intermediate crude oil futures rose more than 8% on Friday. Prices have risen by more than 20% in all of June thus far, and some of the run-up before the conflict could be due in part to traders anticipating rising tensions. What happens over the weekend could play a big role in whether the spike in oil continues. Oil prices moved higher intraday Friday after Iran launched retaliatory missiles toward Israel. In particular, traders will be looking to see if oil infrastructure such as production platforms, pipelines or refineries are damaged in any back-and-forth exchanges between the two nations. Most Wall Street commentary from major investment banks pointed toward a narrow conflict and a short, limited move in oil prices. One outlier was Piper Sandler's global energy strategist Jan Stuart, who said in a note to clients, "we would not fade any oil price rally; this is war." Another variable to consider is the Organization of Petroleum Exporting Countries, or OPEC. A change in production from this group could offset or exacercebate the price impact of an Israel-Iran conflict. "Iranian crude grades may be replaced by Middle Eastern grades, but given regional politics, OPEC nations may hesitate to capitalize on weaker Iranian exports by ramping up the speed at which voluntary production cuts are unwound," Ghali said. — CNBC's Michael Bloom contributed reporting.
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Analysis-OPEC+ would struggle to cover major Iranian oil supply disruption
By Ahmad Ghaddar and Seher Dareen LONDON (Reuters) -Oil market participants have switched to dreading a shortage in fuel from focusing on impending oversupply in just two days this week. After Israel attacked Iran and Tehran pledged to retaliate, oil prices jumped as much as 13% to their highest since January as investors price in an increased probability of a major disruption in Middle East oil supplies. Part of the reason for the rapid spike is that spare capacity among OPEC and allies to pump more oil to offset any disruption is roughly equivalent to Iran's output, according to analysts and OPEC watchers. Saudi Arabia and the United Arab Emirates are the only OPEC+ members capable of quickly boosting output and could pump around 3.5 million barrels per day (bpd) more, analysts and industry sources said. Iran's production stands at around 3.3 million bpd, and it exports over 2 million bpd of oil and fuel. There has been no impact on output so far from Israel's attacks on Iran's oil and gas infrastructure, nor on exports from the region. But fears that Israel may destroy Iranian oil facilities to deprive it of its main source of revenue have driven oil prices higher. The Brent benchmark last traded up nearly 7% at over $74 on Friday. An attack with a significant impact on Iranian output that required other producers to pump more to plug the gap would leave very little spare capacity to deal with other disruptions - which can happen due to war, natural disasters or accidents. And that with a caveat that Iran does not attack its neighbours in retaliation for Israeli strikes. Iran has in the past threatened to disrupt shipping through the Strait of Hormuz if it is attacked. The Strait is the exit route from the Middle East Gulf for around 20% of the world's oil supply, including Saudi, UAE, Kuwaiti, Iraqi and Iranian exports. Iran has also previously stated that it would attack other oil suppliers that filled any gap in supplies left due to sanctions or attacks on Iran. "If Iran responds by disrupting oil flows through the Strait of Hormuz, targeting regional oil infrastructure, or striking U.S. military assets, the market reaction could be much more severe, potentially pushing prices up by $20 per barrel or more," said Jorge Leon, head of geopolitical analysis at Rystad and a former OPEC official. CHANGE IN CALCULUS The abrupt change in calculus for oil investors this week comes after months in which output increases from OPEC and its allies, a group known as OPEC+, have led to investor concern about future oversupply and a potential price crash. Saudi Arabia, the de facto leader of OPEC, has been the driving force behind an acceleration in the group's output increases, in part to punish allies that have pumped more oil than they were supposed to under OPEC+ agreements. The increases have already strained the capacity of some members to produce more, causing them to fall short of their new targets. Even after recent increases, the group still has output curbs in place of about 4.5 million bpd, which were agreed over the past five years to balance supply and demand. But some of that spare oil capacity - the difference between actual output and notional production potential that can be brought online quickly and sustained - exists only on paper. After years of production cuts and reduced oilfield investment following the COVID-19 pandemic, the oilfields and facilities may no longer be able to restart quickly, said analysts and OPEC watchers. Western sanctions on Iran, Russia and Venezuela have also led to decreases in oil investment in those countries. "Following the July hike, most OPEC members, excluding Saudi Arabia, appear to be producing at or near maximum capacity," J.P. Morgan said in a note. Outside of Saudi Arabia and the UAE, spare capacity was negligible, said a senior industry source who works with OPEC+ producers. "Saudi are the only ones with real barrels, the rest is paper," the source said. He asked not to be named due to the sensitivity of the matter. PAPER BARRELS Saudi oil output is set to rise to above 9.5 million bpd in July, leaving the kingdom with the ability to raise output by another 2.5 million bpd if it decides to. That capacity has been tested, however, only once in the last decade and only for one month in 2020 when Saudi Arabia and Russia fell out and pumped at will in a fight for market share. Saudi Arabia has also stopped investing in expanding its spare capacity beyond 12 million bpd as the kingdom diverted resources to other projects. Russia, the second largest producer inside OPEC+, claims it can pump above 12 million bpd. JP Morgan estimates, however, that Moscow can only ramp up output by 250,000 bpd to 9.5 million bpd over the next three months and will struggle to raise output further due to sanctions. The UAE says its maximum oil production capacity is 4.85 million bpd, and told OPEC that its production of crude alone in April stood at just over 2.9 million bpd, a figure largely endorsed by OPEC's secondary sources. The International Energy Agency, however, estimated the country's crude production at about 3.3 million bpd in April, and says the UAE has the capacity to raise that by a further 1 million bpd. BNP Paribas sees UAE output even higher at 3.5-4.0 million bpd. "I think spare capacity is significantly lower than what's often quoted," said BNP analyst Aldo Spanjer. The difference in ability to raise production has already created tensions inside OPEC+. Saudi Arabia favours unwinding cuts of about 800,000 bpd by the end of October, sources have told Reuters. At their last meeting, Russia along with Oman and Algeria expressed support for pausing a hike for July. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
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an hour ago
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Energy markets are poised to be the next battlefield in the spiraling Israel-Iran conflict
After Israel decimated Iran's military in its initial wave of air strikes, reports on Saturday indicated Iranian energy infrastructure was under attack. Meanwhile, Tehran warned that closing the Strait of Hormuz, a critical chokepoint in the global energy trade, was under consideration. Oil prices spiked on Friday, and escalation of the Israel-Iran conflict could send them higher. The Israel-Iran conflict is poised to include economic targets as both sides seek leverage in the rapidly escalating series of attacks. After Israel decimated Iran's military in its initial wave of air strikes, reports on Saturday indicated Iranian energy infrastructure was under attack. That includes the Pars South gas field, considered to the world's largest reservoir of natural gas, as well as oil refineries. That comes as Israeli Prime Minister Benjamin Netanyahu warned on Saturday that, 'We will strike every site and every target of the ayatollahs' regime,' after he earlier urged the Iranian people to overthrow their government. On Friday, Israel's defense minister said Iran crossed 'red lines' by launching its missiles at civilian areas as part of its retaliatory attacks. Former Deputy Secretary of State Wendy Sherman told Bloomberg TV that she believed that's a signal Israel will target Iran's oil and economic infrastructure. Meanwhile, Tehran's retaliation could similarly extend into energy markets. Despite Iran launching hundreds of missiles and drones at Israel, analysts have noted that it has few viable military options and its overall capabilities have been severely degraded by Israel. An Iranian lawmaker said closure of the Strait of Hormuz, a critical chokepoint in the global energy trade, was under serious consideration. The equivalent of 21% of global petroleum liquids consumption, or about 21 million barrels per day, flows through the strait. That could spike oil prices even higher after they jumped 7% on Friday to more than $70 a barrel as markets reacted to the early stages of the Israel-Iran conflict. In a note on Saturday, George Saravelos, head of FX research at Deutsche Bank, estimated that the worst-case scenario of a complete disruption to Iranian oil supplies and a closure of the Strait of Hormuz could send oil price above $120 per barrel. Such a closure might entail use of mines, patrol boats, aircraft, cruise missiles and diesel submarines, while clearing the strait could take weeks or months. 'Given the significant global implication of such a closure, we believe that potential closure of the Strait is likely to be kept as last resort leverage and only to be considered in extremis,' Saravelos added. In a column in Foreign Affairs magazine on Friday, Kenneth Pollack, a former CIA Persian Gulf military analyst and former director for Persian Gulf Affairs at the National Security Council, said there's a low likelihood Iran would close the strait. That's because Iran would quickly go from a 'sympathetic victim to a dangerous nemesis in the eyes of most other countries,' while Western countries and perhaps even China would use force to reopen the strait, he predicted. 'And Tehran would have to worry that such a reckless threat to the world's economies would convince Washington that the Iranian regime had to be removed,' Pollack added. 'That fear is surely greater with U.S. President Donald Trump—who ordered the death of Iranian general Qassem Soleimani in January 2020—back in office.' This story was originally featured on
New York Times
an hour ago
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Two Major Energy Facilities in Tehran Hit in Israeli Strikes
Iran's latest wave of attacks on Israel took out Tehran's main gas depot and its central oil refinery in separate parts of the capital, engulfing its sky in smoke and flame early Sunday. The Shahran fuel and gasoline depot, which has at least 11 storage tanks, was hit and set afire during the Israeli attack that began on Saturday night, Iran's oil ministry said in a statement. Shahran is in an affluent neighborhood of luxury high rises. 'The fire is terrifying, it's massive; there is a lot of commotion here,' said Mostafa Shams, a resident of the area. 'It's the gasoline depots that are exploding one after another, it's loud and scary.' Separately in the city's south, Shahr Rey, one of the country's largest oil refineries, was also struck, according to Iranian state news media. Emergency crews were trying to contain the fire, and a resident of Tehran, Reza Salehi, said he could see the flames from miles away. Israel's targeting of Iran's energy facilities, a crucial source of export cash for the country as well as of domestic energy, represented a significant escalation in its military campaign against Tehran. Earlier on Saturday, Israel had struck two key Iranian energy sites, including a section of the South Pars Gas Field, which is one of the world's largest and critical to Iran's energy production. 'We have entered the second phase of the war, which is extremely dangerous and destructive,' Abdollah Babakhani, an expert on Iran's energy sector based in Germany, said on Saturday. But the multiple massive explosions targeting energy and fuel targets in and around the capital spread fear among residents. Israeli warplanes also struck sites in Tehran related to Iran's nuclear program, including experimental laboratories, according to two Israeli defense officials who spoke on the condition of anonymity to share sensitive operational details. Hamid Hosseini, a member of the energy committee of Iran's Chamber of Commerce, said Iran's municipality had been discussing moving the Shahran fuel depot from the residential area in northern Tehran for years, fearing an attack or an accident could be catastrophic. The attack on the depot set off massive explosions, according to an official at the oil ministry, who said the depots were exploding one after another and threatened to significantly damage residential neighborhoods in the area. The depot has about 8 million liters per day of gasoline entering its storage tanks and has a capacity to hold about three full days of fuel needs for Tehran, according to the ministry official. Israel did not immediately respond to request for comment on the strike.
