OPEC+ analysis could cushion Iran oil shock, but not wider disruption By Reuters

By Maha El Dahan, Ahmad Ghaddar and Dmitri Zhdannikov

LONDON (Reuters) – OPEC has enough spare oil capacity to offset the total loss of Iranian supplies if Israel shuts down the country’s facilities, but the producer group would struggle if Iran retaliated by hitting its Gulf neighbors’ facilities.

Iran fired hundreds of missiles at Israel on Tuesday in response to Israeli strikes and airstrikes. Israeli Prime Minister Benjamin Netanyahu said Iran had made a big mistake and would pay for it, and Iran threatened a crushing response if Israel retaliated.

Israel’s options include targeting Iranian oil production facilities, among other strategic sites, US news site Axios reported Wednesday, citing Israeli officials. Iran is an OPEC member with an output of about 3.2 million barrels per day or 3% of global output.

Iranian oil exports have climbed this year to near multi-year highs of 1.7 million bpd despite US sanctions. Chinese refiners buy most of its supply. Beijing says it does not recognize unilateral US sanctions.

“In theory, if we were to lose all Iranian production — which is not our base case — OPEC+ has enough spare capacity to offset the shock,” said Amrita Sen, co-founder of Energy Aspects.

OPEC+, which includes OPEC and allies such as Russia and Kazakhstan, has cut production in recent years to prop up prices amid weak global demand. So the group is sitting on millions of barrels of unused capacity.

OPEC+ producer cuts currently total 5.86 million bpd. Analysts estimate that Saudi Arabia is able to increase production by 3 million bpd, and the United Arab Emirates by 1.4 million.

OPEC+ met on Wednesday to discuss meeting the cuts. The group did not discuss the Israeli-Iranian conflict, OPEC+ sources said.

“The only thing mentioned about the geopolitical situation and the conflict was the hope for non-escalation,” said an OPEC+ source familiar with the talks.

While OPEC has enough available capacity to offset the loss of Iranian supplies, much of that capacity is in the Middle East’s Gulf region and is potentially vulnerable if the conflict escalates further, UBS analyst Giovanni Staunovo said.

“The actual available spare capacity could be much less if there are renewed attacks on the energy infrastructure of countries in the region,” he said, adding that the West could have to tap strategic reserves if there were severe disruptions.

Israel has so far refrained from attacking Iranian oil facilities. Oil analysts and security experts said Israel could target Iran’s oil refining sites and the oil port on Kharg Island, which handles about 90 percent of the country’s crude exports.

During the Iran-Iraq war of the 1980s, Baghdad regularly attacked tankers around Kharg Island and threatened to destroy the oil terminal.

“Iran and its proxies could target energy operations elsewhere in the region to internationalize costs if the current crisis escalates into an all-out war,” said RBC Capital Markets’ Helima Croft.

In 2019, a drone attack by Iranian proxies on oil processing facilities in Saudi Arabia briefly knocked out 50% of the kingdom’s crude oil production.

“In the event of an escalation, Iran’s proxies could launch attacks on Middle Eastern oil producers, namely Saudi Arabia,” said Tamas Varga of the PVM.

Riyadh and Tehran have had a political rapprochement since 2019 that has helped ease regional tensions, but relations remain rocky.

Oil prices have traded in a narrow range of $70-$90 per barrel in recent years, despite the war between Russia and Ukraine and the conflict in the Middle East.

A rise in U.S. output helped ease the fear premium in oil markets, said Rhett Bennett, chief executive at Black Mountain, which has operations in the U.S. Permian Basin.

The US produces 13% of global crude oil production and nearly 20% of global liquid petroleum production, compared to OPEC’s 25% global crude production share and about 40% by OPEC+.

“This supply diversity from US domestic sources, combined with healthy spare capacity within OPEC, translates into the market feeling insulated from a dramatic supply shock – regardless of the perpetual crises in the Middle East,” Bennett said.

However, a broad conflict in the Middle East with a major impact on production would inevitably push up oil prices.

That would increase fuel costs. A similar rally in gas prices could hurt US Vice President Kamala Harris in her campaign to win the November 5 presidential election against Republican nominee Donald Trump.

“The United States will likely try to push Israel for a more modest response, wanting to avoid a significant escalation of tensions,” said Warren Patterson of ING.