Smoke rises from an oil storage facility after it appeared to have been struck by an Israeli strike, in Tehran, Iran, June 16. (AP Photo/Vahid Salemi)
Oil prices gained more than $1 per barrel June 17 as the conflict between Israel and Iran played out in the skies over the Middle East and threatened to draw in the United States. There has been no serious damage so far to Iran’s oil export or production infrastructure, just storage facilities, but a June 14 drone strike targeting onshore gas facilities was a possible signal of a change in tactics by Israel.
Damage to Iran’s gas assets at the Iranian industrial hub at Asaluyeh was minimal. There is enough redundancy in the Iranian gas system to make up for outages but not if there are further strikes and prolonged production stoppages.
While most of Iran’s gas is consumed domestically, Tehran relies on oil exports for a significant chunk of revenue, with China and India major buyers of Iranian oil, in contravention of U.S. sanctions. A strike against oil infrastructure would be far more damaging and would impact global oil balances; though, with enough spare production capacity elsewhere, there is no risk of an immediate supply shock.
The International Energy Agency, in its June 17 “Oil Market Report,” noted that “Global oil markets were roiled by a rapid escalation in geopolitical tensions after Israel launched a series of air strikes on targets in Iran on 13 June and Tehran retaliated.” It added that while there has been no impact on Iranian oil flows so far, fears regarding “widening regional disruptions to oil traffic though the crucial Strait of Hormuz drove oil prices higher, with Brent futures reaching a six-month high of $74/bbl.”
Market intelligence provider Kpler wrote that there was a “very low risk of Strait of Hormuz closure. Despite heightened tensions, Iran is unlikely to close the strait due to diplomatic ties with Gulf neighbors and economic dependence on China, which imports nearly half its oil via Hormuz.” However, the collision of two tankers outside the narrow strait off the coast of the United Arab Emirates June 17 has raised fears of another type of warfare that could disrupt shipping through the oil chokepoint short of shutting it down.
The United Kingdom Maritime Trade Operations organization, which monitors shipping activities in the area, on June 17 said it had received multiple reports of increasing electronic interference within the waters of the Gulf and Strait of Hormuz. “Whilst the level of electronic interference continues to rise across the wider region, the levels and intensity inside the Gulf are having a significant impact on vessels positional reporting through automated systems (AIS).” This has led to speculation that the June 17 tanker collision might have been caused by distorted global positioning systems that pose a risk to shipping. Financial Times wrote that its analysis of reported locations of ships in the area showed that at least 170 were affected by interference during a two-hour window June 17.
Oil prices moved above $74/bbl late June 17 as reports from Washington suggested that President Donald J. Trump was mulling allowing U.S. forces to join Israel in attacking Iran’s nuclear facilities. CNN reported two military sources as saying they were preparing for the possibility that Trump would decide to order the U.S. Air Force to help refuel Israeli fighter jets on their way to strike targets in Iran.
While the prospect of an all-out disruption to oil flows remains remote for now, the growing use of electronic warfare, escalating tit-for-tat strikes, and the specter of U.S. military involvement raise the geopolitical temperature – and market anxiety – considerably. The Israel-Iran conflict may not have struck oil infrastructure directly yet, but the margin for miscalculation is shrinking. With nearly one-quarter of the world’s seaborne oil passing through the Strait of Hormuz, the risk premium in oil markets is back.
The views represented herein are the author's or speaker's own and do not necessarily reflect the views of AGSI, its staff, or its board of directors.
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