Israel strike puts all eyes on Hormuz and $100 oil

Reuters

2 days ago

LONDON, June 13 - Israel's strikes on Iran on Friday have raised the prospect of global oil prices hitting $100 a barrel. If Tehran seeks to escalate the conflict by retaliating beyond Israeli borders, it could seek to choke off the Strait of Hormuz, the world's most important gateway for oil shipping.
Israel launched a wave of strikes on Iran's nuclear facilities, ballistic missile factories and military commanders, prompting Iran to launch drones against Israel. It is likely the two archenemies will continue to exchange blows in the coming days.
Oil prices soared by more than 8% to $75 a barrel on Friday on the news.
The United States has sought to distance itself from the Israeli strikes while President Donald Trump urged Iran to return to their bilateral nuclear talks.
While Tehran may strike Israel with additional drones or ballistic missiles, it could also opt to target the Middle East military facilities or strategic infrastructure of the United States and its allies such as Saudi Arabia and the United Arab Emirates. This could include oil and gas fields and ports.
Of course, the most sensitive point Tehran could target is the Strait of Hormuz, a narrow shipping lane between Iran and Oman. About a fifth of the world's total oil consumption passes through the strait, or roughly 20 million barrels per day (bpd) of oil, condensate and fuel.
If that scenario played out, it would likely push oil prices sharply higher, very possibly into triple-digit territory, as OPEC members Saudi Arabia, Iran, the United Arab Emirates, Kuwait and Iraq export most of their crude via the strait, mainly to Asia.
To be sure, an Iranian strike in the Gulf risks drawing a response from the United States and its regional allies, dramatically escalating the conflict and stretching Iran's military capabilities. But Iran has been heavily weakened over the past year, particularly following Israel's successful campaign against Hezbollah, the Iranian-backed militants in Lebanon.
With its back to the wall, Tehran could see an attack now as a deterrent.
The U.S. military and its regional allies will obviously seek to protect the Strait of Hormuz against an Iranian attack. But Iran could use small speed boats to block or seize tankers and other vessels going through the narrow shipping lane. Iran's Revolutionary Guards have seized several western tankers in that area in recent years, including a British-flagged oil tanker in July 2024.
However, any Iranian efforts to block the strait, or even delay transport through it, could spook energy markets and lead to disruptions in global oil and gas supply.
Saudi Arabia and the UAE have sought in the past to find ways to bypass the Strait of Hormuz, including by building more oil pipelines.
Saudi Arabia, the world's largest oil exporter, sends some of its crude through the Red Sea pipeline that runs from the Abqaiq oilfield in the east into the Red Sea port city of Yanbu in the west.
The Saudi Aramco-operated pipeline has a capacity of 5 million bpd and was able to temporarily expand its capacity by another 2 million bpd in 2019.
It is used mostly to supply Aramco's west coast refineries. Saudi Arabia also exported 1.5 million bpd of oil from its west coast ports in 2024, including 839,000 bpd of crude, according to data from analytics firm Kpler.
The UAE, which produced 3.3 million bpd of crude oil in April, has a 1.5 million bpd pipeline linking its onshore oilfields to the Fujairah oil terminal that is east of the Strait of Hormuz.
But even the western route could be exposed to attacks from the Iran-backed Houthis in Yemen, who have severely disrupted shipping through the Suez Canal in recent years.
Diverting oil away from the Strait of Hormuz would be more difficult for Iraq and Kuwait, which only have coastlines on the Gulf.
One factor that could keep a lid on crude prices, however, is that these heightened Middle East tensions come at a time of ample global oil supply.
Rising production in the United States, Brazil, Canada, Argentina and other non-OPEC countries has reduced the global market share of the Middle East in recent years. This could help mitigate if not fully offset any supply disruption.
Additionally, any serious disruption to oil supplies in the Middle East would also likely prompt the International Energy Agency to trigger the release of strategic reserves.
Investors have often shrugged off Middle East tensions in recent years, believing that the potential for a truly regional clash is limited. They may do so again, particularly if this strike pushes Iran back to the negotiating table with the U.S. over Tehran's nuclear program.
But crude prices are apt to be volatile in the coming days as traders seek to get a handle on where this conflict is heading.
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