Full Blown War Could Choke Strait of Hormuz

Tensions are persisting in the Middle East, Aditya Saraswat, Rystad Energy’s Middle East research director, said in a market update sent to Rigzone by the Rystad team on Thursday.

“Energy market fundamentals have been largely unaffected to date, but this could change at a moment’s notice,” Saraswat warned in the update.

“In a widespread regional war scenario, Iran and Israel’s conflict could severely impact gas exports and lead to delays in oil development projects,” the research director added.

“Attacks on key facilities may threaten nearly 1.4 million barrels per day of Iranian production, causing significant supply disruptions,” Saraswat continued.

“A full blown war could choke the Strait of Hormuz, risking up to 12 million barrels per day of oil, driving prices up sharply. Asian oil importing nations would face increased costs and disrupted supply chains, heightening market concerns,” the Rystad representative went on to state.

Rystad warned in the update that predicting the outcome of rising tensions between Iran and Israel remains challenging. The company added that, if the status quo is maintained, with no direct attacks between the two nations, it expects the conflict to remain largely a proxy war, with no major assaults on critical oil and gas infrastructure such as pipelines, storage facilities, or refineries.

Should a “war time scenario” occur, however, Rystad warned in the update that it expects Iran and Israel to engage in an active war, with attacks on upstream facilities, pipelines, and storage units.

“Markets are increasingly concerned about such escalations, leading to a 10 percent surge in oil prices from the beginning of October to the $80 per barrel mark this week, although prices have since fallen below $75 per barrel as concerns look to gradually ease and demand outlook weakens,” Rystad said in the update.

“Brent crude prices may further be impacted amid recent reports of Saudi Arabia rolling back its voluntary OPEC cuts and a reduction in Libya’s oil production due to internal disturbances,” it added.

In a report sent to Rigzone last week, Ole R. Hvalbye, a commodities analyst at Skandinaviska Enskilda Banken AB (SEB), highlighted that the market was “holding its breath, awaiting Israel’s response to Iran’s missile attack”.

“Israeli retaliation could range from a limited strike, which might not provoke severe Iranian retaliation, allowing Iran to continue its crude exports to China at approximately two million barrels per day, to more severe attacks potentially provoking Iran to target oil infrastructures in the UAE and Saudi Arabia and to attempt to block the Strait of Hormuz which transports 18 million barrels per day of crude to the global market (20 percent of global oil consumption),” he added.

“This blockade could severely constrain supply, spiking oil prices given the already low U.S. crude inventories,” he warned.

“Despite the low probability of a worst-case scenario, the global markets remain on edge following the unexpected events like Russia’s invasion of Ukraine,” Hvalbye continued.

In a report sent to Rigzone by the Macquarie team last week, Thierry Wizman, Global FX & Rates Strategist at Macquarie Group, warned that “there’s the premise that Iran’s oil infrastructure may be attacked, of course, but there’s also the threat that Iran may deliberately blockade the Strait of Hormuz in response to Israel’s response”.

“The prospect that oil prices rise to $100 per barrel is, no doubt, intended to put pressure on Israel to refrain from attacking Iran at all,” he added.

In a separate report sent to Rigzone earlier this month, Bloomberg Intelligence analysts said oil prices could move sustainably north of $100 a barrel if Iran’s October 1 missile attack on Israel triggers a retaliatory cycle that targets energy infrastructure or closes the Strait of Hormuz.

In a market analysis sent to Rigzone on October 4, Rania Gule, a Senior Market Analyst at XS.com, said “the recent events in the Middle East heighten fears of disruptions to global supply, and such a scenario could lead to a sharp rise in prices, especially if the Strait of Hormuz, a vital artery for global oil flows, is targeted”.

“Should the situation escalate into open conflict, oil prices could exceed $100 per barrel in the medium term,” Gule warned.

To contact the author, email andreas.exarheas@rigzone.com