Brent Crude oil prices naturally spiked overnight following Israel’s attacks on Iran. The news is still developing, with reports that Iran’s nuclear facilities were targeted, as well as top military commanders. Israel said that the attacks would continue in the coming days at least, while Iran was reportedly moving to declare war on Israel.
The situation marks a substantial escalation from earlier in the year when Israeli strikes on Iran were followed by a missile barrage and then relative calm. The language being used by both sides now implies that the conflict could extend for a period of time that would likely keep Brent Crude oil prices elevated. About 20% of global crude production flows through the Strait of Hormuz, and could be disrupted if a conflict escalates in the region.
How Much is Oil Impacted?
So far, there have been no reports of explosions at Iran’s oil infrastructure, and no restrictions have been placed on oil shipments in the region. Nevertheless, a quick look at shipping in the Persian Gulf sees ships piled up around the Strait of Hormuz without crossing. At least a short-term disruption of shipping seems likely.
Iraq, which has around 5% of global crude production, is highly reliant on exports through the Strait, as well. Iran is a major supplier to the world’s largest crude importer, China. But the issue for now is whether the conflict escalates beyond trading airstrikes. Iran and Israel, of course, do not share a border, and neither have the naval capabilities to invade each other. As long as Israel doesn’t attack Iran’s oil production facilities, then oil supply could be maintained even if the conflict continues.
Beyond the Current Moment
The issue is whether the conflict will escalate and bring in other actors that would directly affect oil transit. The US said it was not involved in the attack, though it was given advance notice. American embassies in the region were seen planning reducing personnel as early as Wednesday. Iran contends that the US contributed to the attack and will “respond”. The threat of escalation remains, and only time will tell whether it will actually happen.
If the situation remains contained and calms down in the medium term, then broader market dynamics would likely reassert themselves. According to the Bank of America, Saudi Arabia is preparing for a protracted price war to recapture market share from US shale producers. The Kingdom had been voluntarily curtailing production as a way to keep prices elevated and improve its margins. But the recent production increases aligned with OPEC+ agreements suggests that Saudi Arabia has shifted its stance. US share producers need a price of around $65/bbl to break even. Keeping prices below that would put pressure on US producers if sustained for a long time.
Price War Escalate, But Not Prices
The lower prices in crude over the last several months are already having an effect, as US producers are winding down drilling. Active drilling rigs are at the lowest level since the pandemic, which means lower supply on the market.
While the global economy is seen constrained from the tariff war, this drop in production hasn’t been enough to support Brent Crude oil prices. Particularly with the Chinese economy facing challenges. But a resolution of the trade deal could see global demand rising, and the reduced production as result of lower prices might become a factor supporting prices once more.