As oil traders prepare for the market to open after the sudden eruption of war in Israel, one question is key: will the conflict spread to the rest of the region?<\/p>\n
Crude traders don\u2019t expect a massive price surge as there\u2019s no immediate threat to supply. But all eyes are on Iran, a major oil producer and key backer of the Hamas group that launched this weekend\u2019s offensive on Israel.<\/p>\n
A retaliatory strike against the Islamic Republic would inflame fears over the Strait of Hormuz, the vital shipping artery which Tehran has previously threatened to close. There\u2019s also the prospect of the US cracking down again on a resurgent flow of Iranian oil exports.<\/p>\n
Related Article:\u00a0U.S. Disrupts Multimillion-Dollar Shipment of Iranian Crude and Seizes Cargo<\/p>\n
\u201cIran remains a very big wild card,\u201d said Helima Croft, chief commodities strategist at RBC Capital Markets and a former CIA analyst. \u201cIsrael will escalate its long-running shadow war against Iran\u201d and \u201cwhat is unpredictable is how Iran would respond to such an intensification.\u201d<\/p>\n
The risk of a wider conflict has emerged just as\u00a0global crude supplies\u00a0have been depleted by months of sharp production cutbacks by Saudi Arabia and Russia. Last month their supply constraints briefly pushed Brent futures to almost $100 a barrel.<\/p>\n
\u201cIt is unlikely to impact oil supply in the short term,\u201d said hedge fund trader Pierre Andurand, founder of Andurand Capital Management LLP. \u201cBut it could eventually have an impact on supply and prices.\u201d<\/p>\n
The onslaught comes almost exactly 50 years after the Arab oil embargo, when Saudi Arabia and other OPEC producers choked off flows to the west in the wake of the 1973 Yom Kippur War, which also involved Israel.<\/p>\n
No one expects Riyadh \u2014 which has been negotiating with Washington over normalizing relations with Israel\u00a0\u2014 to turn off the taps in solidarity with the Palestinians now. At worst, the conflict may derail the normalization talks and scupper any additional Saudi oil flows that may have resulted.<\/p>\n
The energy minister of the United Arab Emirates, a key OPEC member, was clear on Sunday that the conflict wouldn\u2019t affect the group\u2019s decision-making.<\/p>\n
\u201cWe do not engage in politics; we govern by supply and demand, and we do not consider what each country has done,\u201d Energy Minister Suhail Al Mazrouei told reporters in Riyadh.<\/p>\n
For its part, Iran, also an OPEC member, has expressed support for the Palestinian attack.<\/p>\n
If Israel responds by striking any Iranian infrastructure, \u201ccrude prices would immediately spike on the perceived risk of a disruption,\u201d said Bob McNally, president of Rapidan Energy Group and a former White House official. For now, that looks unlikely, he said.<\/p>\n
Iranian oil has become increasingly important to the market as shipments have rebounded to a five-year high. That has come with\u00a0Washington\u2019s tacit blessing\u00a0as the two sides have engaged in tentative diplomacy to re-establish limits on Tehran\u2019s nuclear program.<\/p>\n
This weekend\u2019s hostilities could prompt President Joe Biden\u2019s administration to deal more aggressively with those cargo flows, which mostly go to China.<\/p>\n
\u201cI think this development will mean stronger enforcement of Iranian sanctions, so less Iranian oil going forward,\u201d said Andurand. \u201cAnd then who knows what the domino effect will be in the region?\u201d<\/p>\n
In a more extreme scenario, Iran could respond to any direct provocation by blocking the\u00a0Strait of Hormuz, a nautical choke-point just north of the Arabian Sea.<\/p>\n
Tankers haul\u00a0<\/strong>nearly 17 million barrels of crude and condensate each day through the waterway, which at its narrowest point is just 21 miles wide. Tehran threatened to close the strait when sanctions were imposed on the country in 2011, but ultimately backed off.<\/p>\n The swelling tide of Iranian barrels has helped to moderate fuel prices this year while the Saudis and Vladimir Putin\u2019s Russia squeeze supplies. The joint Riyadh-Moscow action is draining oil inventories at the\u00a0fastest pace in years, installing a hefty price premium on prompt supplies known in the industry as backwardation.<\/p>\n The \u201ccrude market is very tight\u201d as \u201cphysical markets are screaming, with backwardation heading higher, dragging the flat price higher,\u201dsaid Gary Ross, a veteran oil consultant turned hedge fund manager at Black Gold Investors LLC.<\/p>\n Last week brought signs that the push toward $100 had gone too far, as Brent slumped 11% to just under $85 on the ICE Futures Europe exchange.\u00a0Production cuts\u00a0by the Saudis and Russia may have juiced prices too high, exacerbating jitters over the economy and bolstering the risk of higher interest rates.<\/p>\n On the other hand, slashing output to about 9 million barrels a day has given Riyadh an immense buffer of spare production capacity that could be deployed if the current crisis leads to a disruption. The kingdom has about 3 million barrels day in reserve, and neighboring United Arab Emirates has another 1 million, according to Bloomberg estimates.<\/p>\n That prodigious safety cushion of idle capacity is another reason traders don\u2019t expect an immediate price surge when markets reopen. Still, the events may restore some of the geopolitical risk premium that had melted away in recent years.<\/p>\n \u201cThe Hamas strike and Israeli response raises the geopolitical temperature,\u201d said Richard Bronze, head of geopolitics at consultant Energy Aspects Ltd.<\/p>\n \u2013With assistance from\u00a0Fahad Abuljadayel,\u00a0Salma El Wardany\u00a0and\u00a0Anthony Di Paola.<\/p>\n \u00a9\u00a02023\u00a0Bloomberg L.P.<\/p>\n