Iran, Israel and the one simple question for oil markets

Reuters/Morteza Nikoubazl/NurPhoto

The oil market clichés were out in force after the unprecedented weekend attacks by Iran on Israel.

Traders “shrugged off” the launch of more than 300 drones and missiles, “breathed a sigh of relief” that almost all of them failed to reach their targets, and even “took in their stride” the possible retaliation that could come from Israel.

This know-all wisdom was occasioned by a 1 percent fall in the price of Brent crude to below the “psychologically significant” $90 a barrel level, and was evidence that significant risk premium was “already priced in the market”.

I’m not sure how you can read all that complacency into such a comparatively small and possibly short-lived fall in crude prices. In a week or two it could be just a micro-blip on Brent’s inexorable rise to $100 a barrel. We shall see.

But what is pretty clear is that all the risk has moved to the supply side of the global oil equation.

The Iranian attacks did nothing to change the demand fundamentals, and barring a catastrophic escalation of global proportions, it is difficult to see how anything Israel or Iran do from now could alter the comparatively benign demand outlook.

---

---

Last week’s monthly oil market report by Opec, consistently the most reliable barometer for these things, predicted a rise in oil demand in 2024 of 2.2 million barrels per day (bpd), with a surge in demand in the third quarter in particular.

The two most important global economies, the US and China, will be leading that growth.

On the supply side, however, it is all one big “what if?”

• Oil price to hit $100 if Opec+ cuts continue says Vitol chief

• Opec stands by predictions for oil demand growt

• IEA predicts oil supply will turn to deficit in 2024

Will Israel escalate again after the Iranian attacks? All the diplomatic mood-music is that this is an opportunity for the country to dial down the tension, avoiding a move that would further provoke Iran. But since October 7 last year that hasn’t been the current Israeli government’s state of mind.

Do we believe Iran when it says that the weekend attacks mean this phase of its confrontation with Israel should be “deemed concluded”? It is hard to see how such a decades-long confrontation can be frozen at this elevated state of tension.

For oil markets, the issue really boils down to one simple question: if Iran chose to escalate regionally, would it, could it, close the Straits of Hormuz, through which 20 percent of global crude passes?

Some traders saw last week’s hijacking of an Israeli-owned vessel, on its way from the UAE to Mumbai, by Iranian forces as a more sinister portent than the drone and missile attacks.

Some saw the hijacking of an Israeli-owned vessel by Iranian forces as a more sinister portent than the drone and missile attacks

Omar Najia, global head of derivatives at BB Energy, said that the seizure amounted to a serious threat to traffic in the Arabian Gulf. “Iran has signalled that it will shut Hormuz,” he told the Gulf Intelligence energy markets podcast on Monday.

This was unlikely, other analysts said, pointing to Iran’s past inability to close the straits for long, even during the “tanker battles” of the Iran-Iraq war, and the damage such a closure would do to Iran’s own oil-dependent economy.

If the straits were closed, it would undoubtedly cause a sharp spike in the oil price, that much is certain.

It is another potential complication for the oil supply policymakers, who are due to meet in June in Vienna in what promises to be a hugely significant meeting of ministers of Opec+, the oil alliance led by Saudi Arabia and Russia.

All other things being equal, you would expect that, with prices rising and demand healthy, Opec+ would consider reversing at least some of the cuts it rolled over for six months at the end of last year, and maybe signalling a gradual reintroduction of the total later this year.

Between them, Saudi Arabia, Iraq and Kuwait are keeping some five million barrels off global oil markets, including their Opec+ cuts, which is sufficient reserve to deal with a sudden spike. All three of them depend mainly on the Straits to export their product.

In fact, all other things are far from equal, with US presidential elections, the war in Ukraine, and intensifying sanctions against Russia all adding to the geopolitical pressure on oil.

The question being asked in oil trading rooms is: how much longer can the crude markets downplay these growing outside pressures?

Frank Kane is Editor-at-Large of AGBI and an award-winning business journalist. He acts as a consultant to the Ministry of Energy of Saudi Arabia and is a media adviser to First Abu Dhabi Bank of the UAE