A man walks past a billboard with a slogan reading in Farsi (top): "The beginning of the end of Zion" and in Hebrew: "The beginning of the end of the fake regime", in Tehran on Oct. 3. Iran on Oct. 1 launched a barrage of missiles at Israel in response to the killing of Hezbollah chief Hassan Nasrallah alongside Revolutionary Guards commander Abbas Nilforoushan in a strike on the Lebanese capital last week.-/AFP/Getty Images
The expanding Middle East conflict has rattled global oil markets as commodity traders weigh concerns about reduced crude supplies, especially if Israel attacks Iran’s oil production sites.
Saudi Arabia, United Arab Emirates, Kuwait and Iraq – which are members of the Organization of Petroleum Exporting Countries (OPEC) – have enough spare capacity to cover for lost barrels of Iranian production, industry experts say.
If Israel does strike Iran’s oil facilities, any price shock is expected to be short-lived. But it’s difficult to predict what might transpire if the crucial Strait of Hormuz for oil tankers in the Persian Gulf were to be closed for a prolonged period, according to an energy analysis by Poten & Partners.
“Oil markets currently have ample spare capacity, which is helping stabilize prices, even amidst a severe crisis in the Middle East,” it said.
Regional conflict has only caused minimal disruption of Iranian production over the past year, but the stark possibility of an Israeli counterattack in the form of strikes on oil facilities would change that.
“An escalation of the hostilities involving Iran’s oil infrastructure has the potential to create havoc in the oil and tanker markets,” Poten & Partners said.
On Oct. 1, Iran launched nearly 200 ballistic missiles at Israel in retaliation for Israeli killings of militant leaders in Lebanon. While the region’s tensions are intensifying, the world’s oil demand growth has stagnated with the trend toward renewable energy.
On Friday, West Texas Intermediate (WTI) crude futures closed at US$74.38 a barrel, while global Brent oil futures finished at US$78.05 a barrel. Both benchmark contracts rose 9 per cent last week but are still well off pricing levels seen a year earlier.
Svetlana Tretyakova, a senior analyst of oil markets at Rystad Energy, has been closely watching the escalation in the Middle East.
“What it means is when we talk about capacity, it’s not an immediate action, because it can take them a couple of months to ramp up production. That’s why we can see those spikes and increases in oil prices in a short period of time, but that is not going to last long,” she said in an interview.
The oil market impact would of course depend on the extent of damage inflicted by Israel, Ms. Tretyakova said. Iran produces about four million barrels a day. If that production is completely lost, it will likely take other countries a month or so to increase output to meet the gap in demand.
Whether that will hit the global market is another question.
The majority of Iranian oil exports head to China. Demand in China already has been flagging for a while, Ms. Tretyakova said, “so that also probably reduces overall impact on oil prices.”
OPEC, led by Saudi Arabia, had sprung up as the dominant industry player after the Arab oil embargo of the 1970s. Its influence faltered in the mid-1980s as its members such as Iran couldn’t agree on quotas, while non-OPEC suppliers such as those in the North Sea thrived.
Industry analysts, however, say the cartel continues to have an outsized impact.
The recent increase in oil prices triggered by the Middle East conflict prompted the S&P/TSX Capped Energy Index to gain 8.5 per cent last week.
Canadian Natural Resources Ltd. CNQ-T rose 7 per cent during the week while Suncor Energy Inc. SU-T jumped 9 per cent.
“Oil revenue is a crucial source of funding for the Islamic Republic and allows Iran to provide aid to Hezbollah and Hamas,” S&P Global said in a research note, adding that Iran’s oil facilities would be a tempting target for Israel.
Iran also backs Yemen’s Houthi rebels, who are hostile to Israel.
Canada is dependent on prices set on global oil markets. Still, the key factor influencing the domestic industry has been the opening in May of the Trans Mountain expansion (TMX) pipeline project.
Production in Canada already increased with the launch of TMX, which links crude and refined products from Alberta’s oil sands to the Westridge Marine Terminal in Burnaby, B.C., where vessels depart, carrying exports of heavy oil.
The price spread between U.S. benchmark West Texas Intermediate crude and lower-priced Western Canadian Select (WCS) heavy crude narrowed last week.
“It looks like TMX is having, at least so far, the expected impact of keeping WCS-less-WTI differentials a lot narrower than what is normally seen in the normal seasonal widening,” Dan Tsubouchi, chief market strategist at SAF Group, said in a research note.
With the addition of the pipeline system’s new capacity of 590,000 barrels a day of heavy crude, TMX will be able to handle a total of more than 890,000 barrels a day of oil and refined products.