Escalating Middle East crisis sparks oil price fears

The escalating crisis in the Middle East is triggering fears of sky-high oil prices

Oil prices could surge to US$100 a barrel if Iran's missile attack on Israel triggers a retaliatory cycle that targets energy infrastructure or closes the Strait of Hormuz, according to the latest analysis from Bloomberg Intelligence. It notes that for now, oil output and flows remain undisrupted, and upward pressure on prices may remain subdued after a 5% jump on 1 October, if escalation is avoided.

Iran's direct missile attacks on Israel have had a relatively muted impact on oil prices, with oil output and flows remaining undisrupted thus far, though a retaliatory cycle targeting energy infrastructure would result in a larger price spike. Direct attacks on energy facilities could severely disrupt oil production in the Gulf, as Yemeni drone attacks on the Abqaiq oil facilities did in 2019.

Salih Yilmaz, senior energy industry analyst at Bloomberg Intelligence commented, “In the extreme-case scenario, closing of the Strait of Hormuz could drive prices above US$100 a barrel. The strait is the only maritime route out of the Gulf, making it the world's most vital oil-supply bottleneck, with its daily flow of 21 million barrels, roughly 20% of global consumption.”

Iran's last direct attack on 13 April had a limited impact on oil prices as further escalation was avoided, Bloomberg notes.

Rystad Energy chief economist Claudio Galimberti commented, “The intensifying conflict in the Middle East is generating significant supply concern in the global crude market, with prices up more than 4% this week. The potential for supply disruptions – particularly, but not exclusively from Iran – increases as the fighting intensifies.

“But OPEC+ still sits on unusually ample spare capacity, which is the result of successive production cuts over the past two years. This spare capacity is for now preventing runaway prices amid one of the deepest and most pervasive crises in the Middle East in the past four decades.”

Rystad notes that currently, Iran produces approximately 4mn bpd of crude, exporting about half of that, mostly to China. OPEC+ spare capacity is currently more than 5mn bpd, which could be deployed relatively quickly to fill the gap. However, any blockage to the Strait of Hormuz would result in runaway prices.