As tensions escalate in the Middle East, concerns are growing over the potential ripple effects on global oil markets. Industry experts are increasingly apprehensive about what prolonged unrest between Israel and Iran could mean for oil supply and prices, especially if Iran’s oil infrastructure becomes a target in the ongoing conflict. With global economies already navigating economic uncertainties, the fear of major disruptions in oil production and trade routes is looming large.

Recent developments have already begun pushing oil prices higher. U.S. crude futures rose by 5% on Thursday, driven by concerns that Israel might retaliate against Iran for Tehran’s missile attack earlier in the week. The rising tension between the two nations has raised the possibility that Iran’s oil production could be impacted, which would have severe global repercussions.

The Threat to Global Oil Supply

Iran plays a pivotal role in the global oil market, producing nearly four million barrels of oil per day. Any significant disruption to this output would immediately be felt worldwide. According to Daan Struyven, Goldman Sachs’ co-head of global commodities research, “If you were to see a sustained 1 million barrels per day drop in Iranian production, then you would see a peak boost to oil prices next year of around $20 per barrel.” This spike would further strain economies that are still recovering from the pandemic and battling inflation.

The worst-case scenario would see Iran’s critical oil infrastructure being directly targeted. One key concern is Kharg Island, which handles 90% of the country’s crude exports. If this facility were attacked, it would drastically reduce Iran’s export capacity, affecting not only the region but also the global energy supply.

The uncertainty doesn’t end there. The Strait of Hormuz, through which approximately one-fifth of the world’s daily oil production flows, could also be at risk. Any disruption in this strategically crucial waterway, whether caused by direct conflict or Iranian threats to block transit, could send oil prices soaring. Saul Kavonic, senior energy analyst at MST Marquee, expressed concern, stating, “The bigger concern is this is the kind of a much more imminent beginning of a wider conflagration of the conflict which could impact transit through the Strait of Hormuz.”

Implications for Global Oil Prices

If Iranian oil production is severely hit, the effects could be far-reaching. Without intervention from other major oil producers, prices could skyrocket. Struyven notes that if OPEC+ — the group of oil-producing countries led by Saudi Arabia and Russia — does not step in to increase production, the loss of Iranian oil could cause prices to rise by $20 per barrel.

Even if key OPEC members like Saudi Arabia and the UAE ramp up their output to fill the gap, the markets could still see a price boost of up to $10 per barrel. This would further destabilize global markets, especially if prolonged conflict escalates further.

The possibility of a full-scale war in the Middle East has analysts concerned about even steeper price hikes. “In the case of a full-scale war, Brent would likely soar above USD100/bbl, with any potential shut-in of the strait threatening prices of USD150/bbl or more,” wrote analysts at Fitch Solutions’ BMI in a recent note. Such an extreme scenario would send shockwaves through the global economy, straining countries that are already struggling with high energy prices.

The Geopolitical and Economic Fallout

While the likelihood of a full-blown war remains low, according to most analysts, the ongoing uncertainty is enough to keep markets on edge. The volatile situation in the Middle East has left many wondering how much longer the relative stability of oil prices can last. U.S. President Joe Biden, when asked whether the U.S. would support an Israeli strike on Iranian oil facilities, provided a non-committal response, saying, “We’re discussing that.” This ambiguity has only added to market jitters.

A major concern is that even if OPEC+ has enough spare capacity to compensate for losses in Iranian oil output, much of that capacity is concentrated in Gulf states. Should the conflict spill over into other nations in the region, the ability to offset losses could diminish, exacerbating the crisis. If key oil-producing nations like Saudi Arabia and the UAE are drawn into the conflict, the world could face a severe supply shortage, sending prices into uncharted territory.

The Strait of Hormuz: A Critical Chokepoint

The Strait of Hormuz remains a focal point in the apprehensions surrounding a prolonged conflict. As one of the most important waterways for oil transit, any disruption here would have global consequences. Iran has threatened to block the strait in the past, and if the country’s oil sector is targeted, it could follow through on that threat. This would not only affect crude oil shipments from Iran but also from other Gulf nations, cutting off a significant portion of the world’s oil supply.

In such a scenario, prices could escalate rapidly, creating a worldwide energy crisis. Analysts fear that even a brief closure of the strait could cause a supply shock that would be difficult to recover from.

As tensions between Israel and Iran continue to rise, the global oil market faces an uncertain future. Prolonged unrest in the Middle East, particularly if it leads to a disruption in Iranian oil production or the closure of the Strait of Hormuz, could result in skyrocketing oil prices and a destabilized global economy. While the prospect of a full-scale conflict remains unlikely for now, the potential consequences are significant, and the world will be watching closely in the weeks and months to come.

(Adapted from Reuters.com)

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