Iran-Israel tensions raise fears of ‘supercharged oil prices’, disruption in LNG flows; here’s why
Upstox
4 min read • Updated: April 6, 2024, 3:05 PM
Summary
The eruption of a military conflict between Iran and Israel can lead to the suspension of shipping via the Strait of Hormuz, from where one-fifth of the world’s total petroleum supplies are routed. This would lead to the “supercharging of oil prices”, JPMorgan had warned in October 2023, when it was feared that the Gaza war may eventually lead to a direct face-off between the two arch-rivals. The fears escalated this week after a suspected Israeli airstrike killed two senior Iranian officials in Damascus.
The escalation of tensions between Iran and Israel, two of the major powers in the Middle East, has led to fears of “supercharged” oil prices and disruption in the flows of liquified natural gas (LNG) in several parts of the world.
The worries spiked after Tehran vowed to retaliate against the suspected Israeli airstrike on its consulate in Syrian capital Damascus, which led to the death of two senior Iranian officials. Following the attack on April 2, the benchmark Brent crude climbed to $88.66 a barrel – the highest in over five months.
Oil market analysts see Brent staying above the $90-mark if the tensions fail to subside. Although Iran has issued similar warnings earlier, the market is jittery this time as the country has warned the United States, the biggest ally of Israel, to “step aside so that you don't get hit”. The warning was issued publicly on April 5 by Mohammad Jamshidi, the Iranian president's deputy chief of staff for political affairs.
Brent crude for June delivery advanced by 1.45% and settled at $90.65, the highest settlement price since October 20, 2023. The West Texas Intermediate crude futures for May climbed by 1.36% to close at $86.59 a barrel on April 5.
Why crude rates may sharply rise due to Iran-Israel tensions?
Iran shares its coastline with the Persian Gulf, which separates the country from the Arabian Peninsula. The gulf is home to the Strait of Hormuz, from where one-fifth of the world’s total oil supplies are routed.
An eruption of a direct military conflict between Iran and Israel may lead to the closure of shipping via the Strait of Hormuz, analysts said. Between January and September 2023, 20.5 million barrels per day (bpd) of crude oil, condensate and oil products were flowed through the strait, as per the data shared by analytics firm Vortexa.
The US Energy Information Administration (EIA) describes the Strait of Hormuz as the “world’s most important chokepoint”. Oil flow averaged 21 million bpd, or the equivalent of about 21% of global petroleum liquids consumption in 2022, it said. “In the first half of 2023, total oil flows through the Strait of Hormuz remained relatively flat compared with 2022 because increased flows of oil products partially offset declines in crude oil and condensate,” EIA added, citing the latest available data with it.
The disruption of shipping lines due to the closure of Strait of Hormuz may result in a massive spike in oil prices globally, JPMorgan had warned in a note issued in October 2023, when it was feared that the eruption of Israel-Hamas war in Gaza may lead to a wider regional conflict involving Iran.
"If the conflict broadens to include the closure of the Strait of Hormuz —the world's busiest oil-shipping channel— it would shut down the region's oil trade, supercharging oil prices," it had stated.
Based on tanker tracking data published by Vortexa, Saudi Arabia moves more crude oil and condensate through the Strait of Hormuz than any other country. Around 0.5 million bpd transited the strait in 2022 from Saudi ports in the Persian Gulf to Saudi ports in the Red Sea.
“We estimate that 82% of the crude oil and condensate that moved through the Strait of Hormuz went to Asian markets in 2022. China, India, Japan, and South Korea were the top destinations for crude oil moving through the Strait of Hormuz to Asia, accounting for 67% of all Hormuz crude oil and condensate flows in 2022 and the first half of 2023,” the EIA said.
Apart from Saudi Arabia, other Organisation of Petroleum Exporting Countries (OPEC) members including Iran, the UAE, Kuwait and Iraq also use the strait to export most of their crude to the Asian countries.
LNG supplies may come under strain
The closure of the strait is also expected to hit the global supplies of LNG, analysts said, pointing out to the fact that Qatar, the world’s biggest LNG exporter, sends nearly all of its output through the strait.
According to Vortexa, an estimated 80 million metric tonnes or 20% of global LNG exports are routed through the strait annually.
India relies on Qatar for around half of its total LNG imports. In 2023, the country had imported 10.6 million tonnes of LNG from Qatar, while the total annual imports stood at 20.8 million tonnes, data firm LSEG said in February.