There is a sense of apprehension and uncertainty engulfing global businesses and stock markets as the Iran-Israel war and the sitiation across West Asia continues to escalate. Global markets are in turmoil as fresh explosions hit Dubai. Doha, Qatar and Bahrain have also been hit too. Iran, in fact, has warned of ‘harsh, successive’ revenge steps ahead after the United States and Israel launched strikes that killed Iran’s Supreme Leader Ali Khamenei and plunged the Middle East into a new conflict. One of the big concerns is what this means for Crude Oil and the key OPEC+ meeting later today.
Reuters quoted energy analysts at Barclays stating that “Oil markets might have to face their worst fears on Monday. As things stand right now, we think Brent could hit $100 (per barrel), as the market grapples with the threat of a potential supply disruption amid a spiralling security situation in the Middle East.”
OPEC+ meeting today to decide on output: Strait of Hormuz the big gamechanger
At the heart of it all lies the strategic position of the Strait of Hormuz. On Saturday, Tehran warned that it had closed the Strait of Hormuz, the narrow conduit for about a fifth of global oil consumption, raising expectations of a sharp jump in oil prices.
Reuters reported that OPEC+ major oil producers are set to meet on Sunday. The world’s largest energy body may consider increasing output given the current situation. Several tanker owners, oil majors and trading houses suspended energy shipments through the Strait.
The reason that it becomes particularly important is that, till date, the Strait of Hormuz has never been closed for an extended period. Nearly one-fifth of the global oil supply flows through this Strait.
Will oil prices rise?
Explaining the dynamics of the crude oil pricing and decoding the current situation. Vijay Bhambwani, Founder-Promoter, Bhambwani Securities and a market veteran, pointed out that “OPEC has spare capacity that will be stepped up to calm nerves in the international oil markets. OPEC+ is conferring as you read this post. Remember Venezuelan oil which was being smuggled out piggy back on Iranian ghost fleet tankers is officially under US control. Guyana has cranked up output to 9,00,000 bpd which is 50% higher than 3 quarters ago.”
On how much the oil prices are set to rise, Bhambwani explained that, “Undoubtedly yes (crude oil prices will rise)! But I’m circumspect about both the magnitude and the duration of the spike. My reading of the situation is that market watchers are panicking unduly. In addition to usual demand-supply dynamics, oil prices have 4 primary (and more secondary ones) premiums – terror, political, military and speculative premia.
I expect the military premium to rise immediately on Monday morning. But do remember someone somewhere knew this attack was coming, and the same should have been reflected at least partially in oil prices.”
Iran-Israel strike: Key triggers to watch
Most analysts pointed out that the ultimate oil price impact is likely to hinge on whether the IRGC pursues further escalatory actions.
Vishnu Varathan, Head of Macro Research, Asia Ex-Japan, Mizuho in an interview with Reuters, stated that “a broader state of spots of regional attacks/instability may be par for the course – in line with Iran’s warning. Oil prices are likely to remain elevated as production and passage remain prone to attacks and disruptions. OPEC may be under pressure to raise production to try and offset. But a 10-25% premium on oil is not outlandish – even without a blockade of the Strait of Hormuz, which is easily a 50% premium risk event.”
Conclusion
Most energy analysts highlighted that oil prices may respond to the current situation with a $5-10 price increase above the current $73 baseline. However, this is seen as a knee-jerk, near-term reaction more than a long-term concern.