OPEC has enough spare oil capacity to compensate for a full loss of Iranian supply if Israel knocks out that country’s facilities, but the producer group would struggle if Iran retaliates by hitting installations of its Gulf neighbors.
Iran on Tuesday fired hundreds of missiles at Israel in response to Israeli airstrikes and attacks.
Israeli Prime Minister Benjamin Netanyahu said that Iran made a big mistake and would pay for it, while Iran threatened a crushing response if Israel retaliated.
Israel’s options include targeting Iranian oil production facilities among other strategic sites, US news Web site Axios reported on Wednesday, citing Israeli officials.
Iran is an OPEC member with production of about 3.2 million barrels per day, or 3 percent of global output.
Iranian oil exports have climbed this year to near multiyear highs of 1.7 million barrels per day despite US sanctions.
Chinese refiners buy most of its supply. Beijing says it does not recognize unilateral US sanctions.
“In theory, if we lost all Iranian production — which is not our base case — OPEC+ has enough spare capacity to make up for the shock,” said Amrita Sen, cofounder of Energy Aspects.
OPEC+, which includes OPEC and allies such as Russia and Kazakhstan, has been cutting production in the past few years to support prices amid weak global demand. So the group is sitting on millions of barrels of spare capacity.
Cuts by OPEC+ producers currently total 5.86 million barrels per day. Analysts estimated that Saudi Arabia is able to raise output by 3 million barrels per day and the United Arab Emirates by 1.4 million barrels per day.
OPEC+ met on Wednesday to discuss compliance with cuts. The group did not discuss the Israeli-Iranian conflict, OPEC+ sources said.
“The only thing mentioned about the geopolitical situation and the conflict was the hope for non-escalation,” an OPEC+ source familiar with the discussions said.
While OPEC has enough spare capacity to compensate for the loss of Iranian supplies, much of that capacity is in the Middle East Gulf region and potentially vulnerable should the conflict escalate further, said Giovanni Staunovo, an analyst at UBS.
“The effectively available spare capacity might be much lower if renewed attacks on energy infrastructure on countries in the region happen,” Staunovo said, adding that the West might have to tap strategic reserves if there were severe disruptions.
Israel has so far refrained from attacking Iranian oil facilities. Oil analysts and security experts have said Israel could target Iran’s oil refining sites and the Kharg Island oil port, which handles about 90 percent of the country’s crude exports.
During the Iran-Iraq War in the 1980s, Baghdad regularly attacked tankers around Kharg Island and threatened to destroy the oil terminal.
“Iran and its proxies could potentially target energy operations in other parts of the region in order to internationalize the cost if the current crisis devolves into an all-out war,” said Helima Croft from RBC Capital Markets.
In 2019, a drone attack by Iranian proxies on Saudi Arabian oil processing facilities briefly knocked out 50 percent of the kingdom’s crude production.
“In case of an escalation Iran’s proxies might launch attacks on Middle East oil producers, namely Saudi Arabia,” said Tamas Varga from PVM.
Riyadh and Tehran have had a political rapprochement since 2019 that helped ease regional tensions, but relations remain difficult.
Oil prices have traded in a narrow range of US$70 to US$90 per barrel over the past years despite the war between Russia and Ukraine and conflict in the Middle East.
A rise in US production has helped ease the fear premium in oil markets, said Rhett Bennett, chief executive officer at Black Mountain, which has operations in the US Permian basin.
The US produces 13 percent of global crude and almost 20 percent of global oil liquid production compared to OPEC’s 25 percent global crude production share and about 40 percent by OPEC+.
“This diversity of supply from US domestic sources combined with healthy spare capacity within OPEC is translating into the market feeling insulated from a dramatic supply shock — regardless of perpetual Middle East flare ups,” Bennett said.
However, a broad conflict in the Middle East with a major impact on production would inevitably push oil prices up.
That would drive up fuel costs. A related rally in gasoline prices could hurt US Vice President Kamala Harris in her campaign to win the Nov. 5 presidential election against the Republican candidate, former US president Donald Trump.
“The United States will likely try to push Israel for a more modest response, wanting to avoid a significant escalation in tensions,” said Warren Patterson from ING.
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