The price of oil has risen this week due to the tensions that have been escalating in the Middle East, mainly because Iran launched missiles at Israel.
Investors closely monitor the situation as they are concerned that any action by Israel to retaliate could cause global oil supply disruption and push prices higher.
The Organization of the Petroleum Exporting Countries+ (OPEC+), however, may be able to counter a possible supply shock that could put an end to the recent oil rally.
Oil prices are up by almost $7 per barrel since Tuesday following Iran’s missile attacks against Israel.
It is believed that the renewed geopolitical tensions are causing traders to speculate on Israel’s future moves, thereby causing a risk premium in oil prices.
If Israel targets Iran’s oil installations, the result could be a loss of 4% or more of global supply. This would further increase prices.
OPEC+ reserves to stabilize the market?
OPEC+ can help stabilize the market despite these fears. The cartel has implemented production cuts amounting to 5.86 million barrels of oil per day. Eight members have agreed to voluntary reductions totalling 2.2 millions bpd.
OPEC+ plans to slowly unwind the cuts in production by increasing it by 180,000 bpd by December.
According to ANZ Research around 1.4m bpd in Iranian exports may be affected if Israel retaliates and strikes Tehran’s infrastructure.
Iran is OPEC’s third largest producer and pumps about 3.2 millions bpd.
Despite the possibility of a spike in short-term prices, analysts from ANZ think that OPEC’s spare capacity can help to balance the market. This will limit any price increases.
Strait of Hormuz: Risks
The Strait of Hormuz is also at risk from a wider conflict. This vital trade route, which currently transports 17 million barrels of oil per day (bpd), could be affected.
Iran previously hinted that it could disrupt this chokepoint. Regional instability may lead to more supply disruptions.
Houthi rebels aligned to Iran have targeted oil tankers that pass through the Strait on a regular basis, increasing the risk.
The flow of oil across the Strait of Hormuz is unaffected, but a conflict in Iraq involving Iran-backed militias could put Iraq’s 4.2 million barrels per day of oil production at risk.
Israel’s hesitation to attack Iran’s oil installations
Analysts say that despite media reports claiming Israel would target Iran’s crude oil installations, this scenario is unlikely.
Israel would be likely to suffer from strained relations with its key allies in the US, EU and other countries.
ANZ Research states that a disruption in Iran’s oil revenues could prompt an even aggressiver response from Tehran.
Warren Patterson, the head of commodities at ING Group’s, said that Israel could opt for a limited response to US concerns, like targeting missile launchers rather than oil pipelines, in order not upset US interests before upcoming elections.
Oil prices and geopolitical risk
It is difficult to understand the complex relationship between oil prices and geopolitical risk.
ANZ Research has highlighted the fact that events such as 9/11 and Gulf War caused geopolitical risks, but not necessarily a spike in oil price.
Oil prices rose only 9% during the Gulf War despite the fact that the Geopolitical Risk Index increased by 460%.
The market may quickly change its sentiment once immediate threats have passed.
Brent crude, at the time this article was written, was trading at $78.29 a barrel, an increase of 0.9%. West Texas Intermediate, at $74.33, was up by 0.8%. Both benchmarks were at monthly high levels.
Matt Stanley, Kpler’s head of Market Engagement, says that the market is still in a “wait and see” mode. He anticipates not only how Israel will respond but when.
As updates are made, this post OPEC+ spare capability may offset Iran’s supply shock and stop the oil rally.
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