If Iran attacks Israel, Middle East turmoil could lift oil past $100 a barrel

By Myra P. Saefong

Oil prices could rise by $15 a barrel if all of Iran's output is interrupted: analyst

Oil traders know the all-too-familiar drill: Heightened tensions in the Middle East have led to a rally in prices - so far to the highest intraday levels in six months. If Iran, one of the world's largest oil producers, gets directly involved, however, a return to prices of more than $100 a barrel may soon follow.

"Nobody wants to be short heading into the weekend," said Manish Raj, managing director at Velandera Energy Partners. "If the conflicts escalate over the weekend, short sellers will lose their shirts when they wake up on Monday."

What's happened

An April 1 airstrike on Iran's consulate in Syria, which Tehran has attributed to Israel, killed seven Iranian military officers and prompted a vow of retaliation from Tehran.

Since the start of the war in Gaza in early October, there has been a rise in clashes between Israel and Iran-backed Hezbollah militants based in Lebanon. Hamas, which governs Gaza and launched the Oct. 7 attack on southern Israel, is also backed by Iran.

News reports have said that an Iranian attack on Israel is believed to be imminent, with the Wall Street Journal reporting the possibility of an attack as soon as Friday or Saturday.

The U.S. Embassy in Jerusalem issued a travel advisory on Thursday, warning U.S. citizens in Israel against travel outside of major cities such as Tel Aviv.

John Kirby, the Biden White House's adviser for national-security communications, told reporters Friday that the administration is "certainly mindful of a very public, and what we consider to be a very credible, threat made by Iran in terms of potential attacks on Israel," and that it was watching developments "very, very, very closely."

Oil rally

Prices for oil have climbed so far this month alongside the rising tensions in the Middle East, with U.S. benchmark crude futures trading 5% higher and global benchmark Brent crude gaining closer to 6%.

In Friday dealings, May West Texas Intermediate crude was up 76 cents, or 0.9%, to trade at $85.78 a barrel on the New York Mercantile Exchange after trading as high as $87.67, while June Brent crude climbed 90 cents, or 1%, to $90.64 on ICE Futures Europe following a high at $92.18. Both touched their highest intraday levels since October.

Strait of Hormuz holds the key

"Iran's secret weapon is its ability to block the Strait of Hormuz," said Raj, who argued that current circumstances already justify a WTI price of $90 a barrel.

The sea passage between the Persian Gulf and the Gulf of Oman is the world's most important oil-transit chokepoint, according to the Energy Information Administration. In the first half of 2023, its oil flow averaged 21 million barrels a day, which is about 21% of global petroleum-liquids consumption.

Global oil inventories are already at low levels, according to Rob Thummel, senior portfolio manager at Tortoise. "The global oil market is expected to be undersupplied in the second and third quarters of 2024, so a disruption in global oil supplies could cause oil inventories to decline even more," he told MarketWatch - and lead to higher prices for oil.

But Tom Kloza, global head of energy analysis at OPIS, a Dow Jones company, told MarketWatch that in terms of the Strait of Hormuz, "it makes no sense whatsoever for Iran to do anything that compromises flows there or that could lead to restricted Iranian exports."

"This is an 'occasional' trope that we see when markets are rallying," he said.

In emailed commentary, Rania Gule, market analyst at XS.com, said "the prevailing concerns here are direct Iranian intervention in the Israeli-Palestinian conflict, with the Israeli army announcing its readiness to invade Rafah, the last refuge for displaced Palestinians, and I do not think they will intervene under any circumstances."

However, "if Iran enters the war in Gaza, it will significantly disrupt the oil supply chain," said Gule. As the third-largest oil producer in the Organization of the Petroleum Exporting Countries, "its direct involvement in the war will lead to significant movements in the oil market and have a positive impact on oil prices."

Iran's oil production is estimated at around 3 million barrels a day.

Normally, a 1-million-barrel change in the supply-demand equation causes a $5 move in prices in order to balance the market," Jay Hatfield, chief executive officer at Infrastructure Capital Advisors, told MarketWatch. "Consequently, if all of Iranian production were to be interrupted, there could be a $15-[per]-barrel increase" in oil prices.

Given that, such an interruption in supplies is not likely priced into the oil market, and most of the recent strength in oil recently has been "driven by seasonal factors as we move out of a very warm winter into what is likely to be an active summer travel season," said Hatfield.

Tortoise's Thummel believes there is already "a bit of a geopolitical risk premium" - possibly around $5 to $7 - embedded in current oil prices.

He estimated that an attack by Iran could boost the risk premium by $5 to $10 per barrel, causing oil prices to temporarily reach $100 per barrel.

"The offset to all of this is that OPEC+ has meaningful supply that can be brought back to the market in short order," said Thummel. OPEC+ meets again on June 1 and "could add volumes to the global oil supply."

For now, Hatfield believes the most likely scenario is that there is "no immediate interruption in Iranian supply, which should take some pressure off of the oil market."

Victor Reklaitis contributed to this report.

-Myra P. Saefong

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04-12-24 1322ET

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