Although the war against Iran has already shook oil markets, US strikes on Kharg Island reveal more about this conflict’s potential outcome.
It is more than a military objective in the Persian Gulf. The island is where Iran’s oil economy meets the world market.
Washington struck military installations in the area on Friday evening, but left oil terminals unaffected. This choice speaks more to the White House’s strategy than any other.
Small island carrying Iran’s oil
The Persian Gulf is home to the island of Kharg, which lies approximately 26 km off Iran’s coastline. The island is small. It is not large, but it processes nearly 90% of Iran’s crude oil exports. Nearly 1 billion barrels pass through every year.
The island is directly connected to major oilfields by pipelines. The crude oil is stored in large tanks before being loaded into tankers off the coast.
The terminals are large enough to accommodate some of the biggest crude carriers on the planet, which transport oil from the oceans across the seas and refineries.
The majority of this crude oil is now sold to China.
According to tanker tracking groups, Iran exported between 1.1 and 1.5 million barrels of oil per day throughout the war. A large part of the oil passes through Kharg.
Iran’s exports of oil will fall dramatically if the island ceases to operate. There are few alternative ports that can accommodate the same amount of cargo.
The island is like a valve for a nation that relies heavily on its oil revenues. If you turn it off, the cash flow will slow down quickly.
The US strike but spared oil
Donald Trump, President of the United States said that US forces had destroyed military targets in Kharg Island. However, they avoided oil infrastructure. Iranian media reported that explosions were heard near an air defense system, a navy base and other military installations.
The oil terminals were not left intact by accident. The destruction of the oil terminals would have had immediate and global implications. According to the International Energy Agency, the war is already causing the biggest oil supply disruption in history.
The market would be further squeezed and prices could rise at a moment when the Strait of Hormuz shipping is already being pressed.
Instead, the strike removed defensive assets but left the economic lever unaffected.
It is clear. Washington has the ability to reach Iran’s largest oil hub at any time, but so far it hasn’t done it.
The energy infrastructure is now a bargaining tool in this conflict.
Everyone depends on the shipping lanes
Kharg is a very important city when you consider its location.
This island is located in the Persian Gulf not too far from the Strait of Hormuz. This narrow channel is responsible for around a fifth of global oil trading.
In the last two weeks the traffic in the Strait of Gibraltar has been dramatically reduced as shipping companies avoid the area and insurance rates are increasing.
Several Gulf exporters already limit shipments because of security concerns.
The impact of a complete stoppage in tanker traffic will be felt far beyond Iran. Saudi Arabia, Kuwait and Iraq, as well as the United Arab Emirates, all depend on the same route for sending crude oil to Asia and Europe.
The United States Navy has announced that it will start escorting the tankers across the Strait.
Simple. The goal is to keep oil flowing and avoid a supply-shock that could reach beyond the Middle East.
The energy markets are aware of the risks. Since the beginning of this war, oil prices have increased by more than 40%.
Targets that can escalate war
Iran warned against any attacks on its oil infrastructure, which would trigger retaliation by the United States and energy companies in the entire region.
This threat is also present in refineries, terminals for export and pipelines.
In the global system of energy, several sites are notable.
Abqaiq’s oil-processing facility stabilizes a large portion of Saudi Arabian crude production before it is exported. Ras Tanura is the biggest loading port in the world.
Fujairah is a key oil storage and distribution center located outside of the Strait of Hormuz.
In 2019, drones temporarily cut off 5% of world oil supplies when they struck Saudi Arabian facilities in Abqaiq.
This happened when the market was relatively stable. The same disruption would occur during an active conflict, which could cause a system that is already tightly controlled to be even more tight.
The fighting so far has avoided direct attacks against oil infrastructure. This restraint might not last forever.
What should investors be watching now?
In the next few weeks, it may not be battlefield reports but oil logistical updates that will provide us with important information.
The movement of tankers, the shipping insurance rate and the loading activities at Kharg reveal much more than the daily briefings.
Iran continues to export crude oil through the island although its pace fluctuates as vessels hesitate to enter Gulf.
JPMorgan Chase & Co. analysts estimate that if Iran’s island is operational it could continue to export between 1.5 and 1.7 million barrels of oil per day.
Production cuts are likely to follow if the pipelines, tanks, or jetties on the island are damaged. The Iranian oil fields can’t continue pumping forever without a place to ship the oil.
Investors are attracted to Kharg Island for more than just a single project. The island has now become the focal point for the conflict.
Energy traders and military planners both understand this fact.
The price of oil is close to $100 per barrel. Kharg is still active in the market.
Also, they know that things can change quickly. The worst case scenario has not been priced yet.
The post US attack Kharg Island: Why this oil chokepoint may be the deciding factor? This post may change as new information becomes available
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