Israeli strikes on Iran’s ‘oil island’ could send crude prices soaring

What worries oil traders most, as tensions rise following Iran’s missile attack on Israel, is a potential disruption to the flow of crude in the Middle East – and when it comes to Iran, the export terminal on Kharg Island could be a key target for the Israel Defense Forces.

“Kharg Island is where Iran loads most of its crude oil exports,” said Matt Smith, chief analyst at Kpler. “That, as a target, would cripple crude oil exports the most.”

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US President Joe Biden’s response, when asked by the media whether he would support Israel to strike Iran’s oil facilities, contributed to a surge during Thursday’s session that talks were taking place.

Most of Iran’s crude oil exports are sent through Kharg Island, which is located in the northeastern part of the Persian Gulf, according to the US Energy Information Administration, and is sometimes referred to as Iran’s “oil island.”

An attack on the oil terminal on Kharg Island would have “the most disruptive effect, with about 90 percent of Iran’s global exports going through those terminals,” said Gerard Filitti, senior counsel at the Lawfare Project. If that happens, he said, oil prices can be expected to “immediately go up more than 10 percent and continue to go up.”

Repairs at Kharg, “even under the best of circumstances, would take months, and while Iran has other terminals, the distance and capacity of those terminals cannot replace production at Kharg,” said Filitti, whose litigation experience expands into oil and gas. industry.

A comprehensive strike on Kharg Island “cannot be underestimated”, he said. It would be “devastating for Iran’s economy, which relies on oil exports for access to US dollars and the global market.”

Overall, Iran’s oil production averaged 2.82 million barrels per day in 2023, according to S&P Global Commodity Insights. The country’s oil fields are estimated to hold 12% of the world’s total oil reserves.

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Iran’s crude oil exports have averaged nearly 1.5 million bpd this year – almost half of its oil production – and the country aims to increase its oil production capacity to 3.9 million bpd in 2025 from 3.4 million bpd this year, Smith said.

Smith said Israel’s threat of an attack on Iran’s oil infrastructure is “more of a warning than anything at this point.”

Still, the oil market could already be close to being priced out in a scenario where 1.5 million bpd of supply is knocked offline by an Israeli strike on Iranian infrastructure, said Simon Lack, co-manager of Catalyst MLXIX energy infrastructure fund.

Members of the Organization of the Petroleum Exporting Countries could produce another 500,000 bpd or so, while U.S. production could increase by 250,000 bpd, he said. “So I think it’s manageable.”

Reading: Oil shock? How OPEC+ could cushion the blow if the Middle East conflict hits supply.

Meanwhile, Kpler’s Smith said that if Israel were to target Iran’s oil and gas infrastructure, the Abadan refinery near the Iraqi border could be a possible target. That facility represents 17 percent of Iran’s refining capacity and 13 percent of its gasoline supply, he said.

“Targeting an oil refinery would hurt Iran in a number of ways — not only would it reduce the supply of gasoline, but it would also free up crude oil supplies,” Smith said. “Iran is already struggling to find buyers for its crude sanctions. The vast majority are heading to China.”

Still, oil traders raised oil prices this week as tensions flared in the Middle East. Iran launched a missile attack on Israel after Israel began military operations in southern Lebanon in its latest offensive against the Iran-backed Hezbollah militant group.

On Thursday, the global benchmark Brent crude contract BRN00 BRNZ24 gained $3.72, or 5%, to settle at $77.62 a barrel on ICE Futures Europe – up 8.5% for the week. Benchmark U.S. West Texas Intermediate crude for November delivery CL.1 CLX24 added $3.61, or nearly 5.2 percent, to end at $73.71 a barrel on the New York Mercantile Exchange, up 8 .1% for the week.

Tensions between Iran and Israel kept the benchmark U.S. stock indexes, the Dow Jones Industrial Average DJIA and the S&P 500 SPX on track to end lower this week, but the S&P 500 Energy sector XX:SP500.10 was poised for a weekly gain of over 5%.

If Israel strikes Iran’s oil export facilities or refineries, Simon Wong, a research analyst at Gabelli Funds, told MarketWatch that oil prices would likely move higher as a “surge.”

Global benchmark Brent crude prices could rise by $10 to $15 a barrel in response to a disruption in the flow of oil from the Middle East, he said, adding: “What happens next depends on how which Iran responds to”.

Oil export facilities are not Israel’s only potential targets in Iran, Wong said. Others would include nuclear facilities, refineries and air defense installations, he said.

The flow of oil through the Strait of Hormuz – a narrow waterway that borders Iran and is the most sensitive shipping bottleneck for global oil supplies – is also a significant concern.

Oil flow through the waterway averaged 21 million barrels per day in 2022, accounting for 21 percent of global oil consumption, according to the EIA.

“If Iran’s oil production and exports were disrupted, then other OPEC countries could produce more oil relatively quickly to prevent a prolonged oil shortage,” said Rob Thummel, who manages the Tortoise Energy Infrastructure Total Return Fund TORIX at energy asset manager Tortoise.

“The difficulty is that the likely oil supplier to fill any gap in the Iranian deficit is Saudi Arabia or Kuwait,” he told MarketWatch. “These barrels should be transported through the Strait of Hormuz. If Iran could successfully shut down or disrupt oil shipping through the Strait of Hormuz, which borders Iran, then the world has a bigger problem.”

Thummel said a prolonged disruption, such as the closure of the strait that temporarily cuts global oil supply by 20 percent, would cause oil prices to “temporarily rise” — potentially above $100 a barrel.

Note, however, that the US “is very aware of the significance of the Strait of Hormuz and is likely to use all means to keep the Strait open,” Thummel said.

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