A joint US and Israeli attack on OPEC member Iran could disrupt key oil supplies in the Middle East, triggering a global recession in a worst-case scenario.
Iran was the fourth largest oil producer in OPEC at just under 3 million barrels per day in January. The Islamic Republic shares a coastline with the Strait of Hormuz, the world’s most important waterway for global oil trade.
The oil market has long discounted the risk of oil supply disruptions in the Middle East. Bob McNally, a former White House energy adviser to former President George W. Bush, said traders are underestimating the threat posed to markets by Iran’s retaliation to a U.S. attack.
“This is the real deal,” said McNally, founder and president of Rapidan Energy. Crude oil futures prices could rise by $5 to $7 per barrel when trading begins at 6 p.m. ET Sunday, with some risk, he said.
On Friday, Brent crude settled at $72.48 a barrel, up $1.73, or 2.45%, while US West Texas Intermediate crude settled up $1.81, or 2.78%, at $67.02 a barrel.
McNally said Iran could try to intimidate President Donald Trump by making the Strait of Hormuz unsafe for commercial traffic, which could push oil prices above $100 per barrel. He said the market does not appreciate the fact that Tehran has large stockpiles of mines and short-range missiles that could seriously disrupt traffic on the waterway.
More than 14 million barrels a day could flow through the strait in 2025, or one-third of the world’s total seaborne crude exports, according to data from energy consultancy Kpler. Three-quarters of those barrels went to China, India, Japan and South Korea. China, the world’s second largest economy, gets half of its crude imports from the Straits.
“A long-term closure of the Strait of Hormuz guarantees a global recession,” McNally said.
More than 20 million barrels of crude were loaded for export today in the Gulf from Saudi Arabia, Iraq, the United Arab Emirates, Kuwait and Qatar, said Matt Smith, oil analyst at Kpler. Some tankers have been observed avoiding passage through the strait, Smith said.
McNally said the world’s spare oil capacity comes from the Gulf states and would not be able to pass through the strait in the event of a shutdown, effectively shutting it out of the market. About 20% of the world’s liquefied natural gas exports also flow through the strait, mostly from Qatar, and cannot be replaced, he said.
“You see hoarding, especially when Asian countries that were big importers of oil and gas realized that Hormuz was closed,” McNally said. “You see the mother of all bidding wars.”
Oil prices would have to rise enough to trigger a recession that would reduce demand to balance the market, analysts said. “There is not enough discretion or elastic demand for oil,” he said.
McNally said only a small fraction of the crude oil passing through the strait would be able to be redirected. Saudi has a pipeline that spans the country from the east to the west coast of the Red Sea. The UAE has a pipeline that bypasses the Strait of Hormuz and terminates in the Gulf of Oman.
State media reports said Iran launched missile attacks on US bases in Qatar, Kuwait, the UAE and Bahrain. The attacks could affect traffic through the Strait of Hormuz, said Tom Kloza, principal of oil and gas consultancy Kloza Consultants.
“An attack by Iran on other neighbors in the Persian Gulf would change the calculus and the extent of the attacks could put pressure on insurers to raise tanker rates for Strait of Hormuz voyages or prevent them from underwriting any traffic,” Kloza said.
The Trump administration could tap the Strategic Petroleum Reserve if oil prices rise, said Kevin Book, managing director of research at Clearview Energy Partners. According to Energy Department data, the reserve currently holds around 415 million barrels.
“But we’ll say it again: In supply crises, duration matters. So does scale,” Book said in a note to clients on Saturday. “The full Hormuz crisis could outweigh the offsets provided by the strategic stakes among US and International Energy Agency (IEA) members.”
(tags to translate) Breaking News: Markets
