Iran has become the focus of international attention in the wake of Hamas attacks on Israel that prompted large-scale retaliation as the make-or-break actor in what increasingly looks like a new war in the Middle East.
While any war in the Middle East is a potential threat to oil supply security, one involving a producer the size of Iran could have even deeper implications for global oil markets. None of these implications are positive.
Soon after the news of the attacks broke, there were reports claiming Iran, a supporter of Hamas, was involved in their planning. The information was denied by Tehran, while Israel and its biggest ally, the United States, said there was no evidence of Iran's involvement. Yet this did not stop U.S. Senator and vocal war hawk Lindsay Graham from calling on the U.S. to bomb Iranian refineries.
That and similar calls from presidential hopeful Nikki Haley are essentially calls for an escalation of the conflict beyond sanctions, which many analysts see as the most likely course of action that Washington would follow. Such an escalation would quite probably send oil prices above $100 per barrel.
Yet there is also another potential scenario where Iran is the actor taking a bigger role in the conflict.
"The main thing to watch for is whether Iran becomes actively involved in the conflict and the reason why is because of Iran's proximity to the really crucial waterway called the Strait of Hormuz," Rapidan Energy Group's global oil service director Clay Siegle told Bloomberg this week. Related: U.S. Oil Rigs Decrease for Second Week Running, Gas Rigs Rise
Indeed, the Strait of Hormuz, in Iranian waters, is one of the biggest oil chokepoints in the world. The amount of oil that passes through the strait daily is around 17 million barrels of oil, which is equal to about 17% of global oil demand as forecast for this year. It is also equal to close to 90% of Middle Eastern oil that leaves the region via the Persian Gulf.
The importance of the Strait of Hormuz occasionally makes headlines when Iran threatens to close it, which it does when tensions flare up between Tehran and the West. To say that tensions are currently flaring up would be an understatement, which makes the situation fraught with danger.
The danger would spike—and so would prices—if we get to a point where Iran wants to close the Strait of Hormuz and the United States wants to keep it open. That would amount to a direct confrontation between the two that could not end well. For now, however, such a prospect seems remote.
This is perhaps why prices have not really rallied after the Hamas attacks and Israel's retaliatory bombing of Gaza. Indeed, initially the benchmarks jumped but quickly retreated when the American Petroleum Institute reported a massive oil inventory build and the EIA confirmed it.
Still, the potential for supply disruption remains significant. Iran's Foreign Minister, Hossein Amir-Abdollahian, said this week that "other fronts" might open in the war, suggesting escalation is very definitely an option.
At the same time, Iran's President talked with the Saudi Crown Prince as Saudi Arabia has taken the role of moderator, seeking to de-escalate the situation. Per an FT report on the conversation, Ebrahim Raisi said that both Iran and Saudi Arabia "should defend the Muslim and oppressed nation of Palestine at this critical time."
Saudi Arabia, which has been recently working on a deal to build diplomatic relations with Israel, has refrained from taking a side. The U.S., however, just stopped the transfer of $6 billion to Iran as part of a prisoner swap deal, and that would quite likely make Tehran angry.
"The money rightfully belongs to the people of Iran, earmarked for the Government of the Islamic Republic of Iran to facilitate the acquisition of all essential and non-sanctioned requisites for the Iranians," the Iranian mission to the UN said, as quoted by the Wall Street Journal.
That might be the first step of a potential escalation, especially if the hawks in Congress take the upper hand. Even the International Energy Agency has made a statement regarding the conflict and its potential impact on oil markets.
"While there has been no direct impact on physical supply, markets will remain on tenterhooks as the crisis unfolds," the IEA said in its closely-watched Oil Market Report for October. The agency added it stood ready to act in case of a market disruption. The nature of the action remained undisclosed.
Last year, the IEA, together with the U.S. released a massive amount of oil from inventories to arrest the oil price surge. As a result, the U.S. strategic petroleum reserve fell to the lowest in 40 years, equal to about 17 days of consumption, which makes a repeat of last year's release unlikely.
An Iranian involvement in the war between Israel and Hamas would have a major effect on global oil supply security. Perhaps it is awareness of this fact that has motivated the diplomatic rush to an end to the fighting before it escalates.
By Irina Slav for Oilprice.com
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