Energy prices drop as Israeli-Iranian conflicts disrupt crucial petroleum facilities
Oil prices saw a slight dip today, scaling back Friday's enormous 7% surge, as the ongoing military skirmishes between Israel and Iran didn't snag any oil production or export facilities.
Brent crude dipped 93 cents, roughly 1.3%, to $73.30 a barrel this afternoon, while U.S. WTI plunged 99 cents, or nearly 1.4%, to $71.99. Initially, both benchmarks spiked over $4 a barrel in Asian trading but then rolled back their gains. They closed 7% higher on Friday, having surged over 13% during the session, hitting levels not seen since January.
According to Harry Tchilinguirian, group head of research at Onyx Capital Group, "It's all about how this conflict develops around energy flows." So far, production capabilities and export channels have been spared, and there haven't been any attempts from Iran to disrupt energy flows through the Strait of Hormuz.
Iranian missiles struck Israel's Tel Aviv and the port city of Haifa today, causing damage and stirring up fears among G7 summit leaders that the conflict might spread. An exchange of strikes on Sunday led to civilian casualties, forcing both militaries to warn civilians in opposing regions of potential further attacks.
Certain gas infrastructure has sustained damage. Iran partially halted gas production at its South Pars field after an attack by Israel on Saturday. This domestic gas doesn't appear on global markets. Previously, Israel had preemptively shut down its offshore Leviathan gas field.
A significant question hanging in the air is whether this conflict will disturb the Strait of Hormuz, a crucial landmark for nearly a fifth of the world's total oil consumption, amounting to 18 to 19 million barrels per day of oil, condensate, and fuel.
While markets keep tabs on the potential disruption of Iranian oil production due to Israel's strikes on energy facilities, heightened concerns about a Strait of Hormuz blockade could cause oil prices to skyrocket dramatically, as suggested by Toshitaka Tazawa, an analyst at Fujitomi Securities.
Iran, a member of OPEC, currently produces around 3.3 million barrels per day of crude and exports over 2 million barrels per day of oil and fuel. The spare capacity of OPEC+ oil producers to increment production to offset any disruption roughly equals Iran's output, as per analysts and OPEC watchers.
"If Iranian crude exports are disrupted, Chinese refineries, the sole purchasers of Iranian barrels, would need to procure alternative grades from other Middle Eastern countries and Russian crudes," said Richard Joswick, head of near-term oil analysis at S&P Global Commodity Insights.
This quest for alternative crudes could jack up freight rates and tanker insurance premiums, shrink the Brent-Dubai spread, and strain refinery margins, particularly in Asia, Joswick added. China's crude oil throughput shrunk by 1.8% in May compared to the previous year to the lowest level since August, as scheduled maintenance at both state-owned and independent refineries restrained operations.
On Sunday, U.S. President Donald Trump expressed hope that Israel and Iran would seek a ceasefire. Meanwhile, Germany's Chancellor Friedrich Merz voiced optimism that the Group of Seven leaders would reach a consensus to address the conflict and prevent its expansion during their meeting in Canada.
However, Iran has rebuffed mediation efforts while under attack, communicating to mediators Qatar and Oman that it won't negotiate a ceasefire until the Israeli aggression subsides.
- The ongoing conflict between Israel and Iran could potentially disrupt oil production and exports, especially through the Strait of Hormuz, as it constitutes nearly a fifth of the world's total oil consumption.
- If Iranian crude exports are disrupted, other countries like China may need to procure alternative crudes, which could lead to increased freight rates, tanker insurance premiums, a shrunken Brent-Dubai spread, and strained refinery margins, particularly in Asia.
- Besides oil production and exports, the energy sector could also be affected, as Iran partially halted gas production at its South Pars field following an attack, affecting its domestic gas supply but not impacting global markets.
