Markets are scrambling to reassess the impact of the intensifying Israel-Iran conflict, with civilian and energy sites coming under attack and a mounting human toll.
Here is Rystad Energy’s breaking news market update:
Mukesh Sahdev, Global Head of Commodities Markets – Oil, Rystad Energy
“How the unfolding military and humanitarian crisis between Israel and Iran evolves hinges on the responses of the US, EU, Russia, and China, as well as developments on the ground.
Oil markets are heading into a peak demand period in the US and will be looking for signs of stabilization rather than further escalation.
For now, the conflict appears likely to be contained, with the US potentially playing a central role, alongside significant diplomatic efforts from key players in the Middle East.
There are also indications that Iran may be nearing a deal.
Based on our earlier disruption simulations, we see oil prices capped below $80 per barrel.”
Janiv Shah, Vice President, Commodities Markets – Oil, Rystad Energy
“Potential closure of the Strait of Hormuz risks tipping oil markets into heavy undersupply, supporting prices and adding tension.
Given its interest in keeping prices closer to $50, the US could play a stabilizing role.
So far, the Strait, the most critical oil transit route, has not been targeted.
A blockade remains the key risk that could push markets into uncharted territory.
We maintain our view that this is likely to remain a short-lived conflict, as further escalation risks spiraling beyond the control of key stakeholders.”
As markets closed on Friday 13 June, the price of Brent crude spiked to $78 per barrel before correcting and settling near $74 with a few volatile ups and downs.
The muted price movement today does not signal that the market has priced in an escalation toward the worst-case scenario for oil; a major disruption of supply.
Research and discussion from Rystad Energy on the issue points to a lower probability of the conflict escalating into a full-blown war and causing a huge spike in oil prices.
A potential blockage of the Strait of Hormuz by Iran remains the most important market-moving event to watch for, which could tip oil markets into unprecedented territory.
There are no signs yet that such a scenario is on the cards as this conflict could either de-escalate as diplomacy takes the reins, have hostilities continue but stay contained between Iran and Israel, or have the conflict reach new levels with the engagement of multiple countries.
As discussions continue over whether the US will attempt to de-escalate the situation—similar to its approach in the recent India-Pakistan conflict—or instead join forces with Israel to accelerate the military dismantling of Iran, major diplomatic efforts are also underway.
For example, Saudi Arabia is taking significant steps to ensure the safety and care of Iranian Haj visitors during this crisis, marking an important diplomatic initiative.
We maintain our initial view that this will likely be a short-lived conflict, as escalation could lead to the situation getting out of hand for those who seem to control it now.
There are signals of Iran is getting closer to a deal.
We maintain that the US has the power and will to contain the situation.
Oil prices, as per our earlier simulation of disruption, indicated a maximum level of $77 per barrel.
Some signals that point to this viewpoint include:
- Oil production – The countries facing a potentially severe impact on oil production are Iran, Iraq, Saudi Arabia, UAE, Kuwait, and Qatar, collectively representing about 25 million barrels per day.
Of course, not all of that output is in the line of fire.
This is predominantly medium sour barrels which the global refining system needs to prepare for the summer demand and is not something other countries can easily replace.
In our earlier estimates of a 1 million bpd sustained supply disruption, the oil price benchmark can reach nearly $80 per barrel.
If the disruption is as much as 2 million bpd, $90 per barrel is possible.
We are not yet calling for oil prices to touch $100 per barrel on a sustained basis beyond a few days or weeks.
The peak summer demand of August is a key time to watch. - Oil demand – The Middle East accounts for only 10% of global oil product demand, which means the direct impact on oil demand is limited.
However, high oil prices are not conducive to oil demand growth.
The two countries involved in the crisis account for less than 2% of all oil demand, and the entire Middle East accounts for about 10-12% of global demand.
For oil markets, therefore, this is clearly a crude supply and trade flows crisis.
However, there is a strong likelihood of seeing a volatile shift in jet and bunker fuel oil demand. - Oil refining – Middle Eastern refinery runs are still hovering below the magical 10 million bpd level, despite significant investment in capacity in recent years.
Players had aimed to accelerate runs to export products to regions lacking material for domestic consumption, but the demand recovery in those regions has been somewhat tepid and partially accounted for, which continues to cap utilization and run rates.- There is an upside in the future, but utilization rates and runs are forecast to hold steady until at least the end of 2025.
Iran accounts for just over 2 million bpd of total Middle Eastern runs; should refining infrastructure be targeted in subsequent rounds of conflict, domestic product supply would fall significantly, leading to shortages and causing a need for product imports.
The impact on the oil system in Israel is insignificant.
- There is an upside in the future, but utilization rates and runs are forecast to hold steady until at least the end of 2025.
- Oil trade flows – Crude volumes flowing through the Strait of Hormuz have been in the range of 15 million bpd, around a third of total global seaborn export volumes.
In the scenario where there is a full closure of the Strait of Hormuz, Asia would be most impacted by the lack of crude exports, as it takes around 80% of those flows.
China and India account for most of the destination volumes, with limited global capacity to substitute such significant medium sour volumes feeding the semi-complex and complex refining systems.- Previously, volumes could have been replaced by Russian, Nigerian, Venezuelan, Angolan, and US crude. However, discussions on either releasing Russian crudes into the market or setting a lower price cap are still being tabled. Nigerian volumes are slowly being consumed domestically by the new Dangote refinery. Venezuelan challenges with Chevron’s exit have accelerated, where quality issues remain top of the list.
- Around 5 million bpd of products also transit through the Strait, within the current global outlay of demand peaks, which would provide a sharper shock to consumers’ pockets, as tightness existed even before the conflict flare-up. The current strength in cracks and margins is likely to be volatile, and the market would likely see another global reshuffle of flows.
- There could be reason for the further utilization of Saudi Arabia’s East-West pipeline and the UAE’s Habshan-Fujairah pipeline, rerouting volumes away from exposed zones and into ‘friendlier’ territories. Much could rest on the volume availability and cargo allocations to other ports.
- The Iraq-Turkey pipeline has been under-utilized for many months, with upside flows of more than 1 million bpd, and the Iraq Strategic Pipeline has been nearly completely discounted due to war effects.
- OPEC+ spare capacity – This is probably the most important metric that gets debated the most.
The numbers range from 3 million to 6 million bpd, considering the speed at which barrels can make it to the market.
However, the logistics are more important than production levels, owing to exposure of the Strait of Hormuz and vessel availabilities.
Effect on Gas/LNG markets
Iran’s giant South Pars gas fields and processing plants have come under attack this weekend.
The greater field is shared with Qatar, so this could have ramifications beyond Iran’s border.
It is worth noting that Iran is not exposed to the global market through exports or imports of LNG.
Therefore, as long as Qatar’s upstream activities and LNG production can continue as normal, there should not be much of a direct impact on global gas markets.
However, there is a significant risked impact as 20% of the global LNG trade goes through the Strait of Hormuz.
Our view remains that the conflict is likely to be contained, with the US possibly playing a central role alongside significant diplomatic contributions from other players in the Middle East.
However, many unknowns remain, including the extent of regional involvement, the potential for escalation beyond current hotspots and how long the diplomatic efforts can hold up under mounting pressures.