Oil market braces for major price hike on possible Iran supply drop

International crude oil prices could surge by $20 per barrel if Iran’s oil supply drops in a possible escalation of the Middle East conflict, Goldman Sachs says.

“If you were to see a sustained 1.0 million barrels per day drop in Iranian production, then you would see a peak boost to oil prices next year of around $20 per barrel,” Daan Struyven, co-head of global commodities research at Goldman Sachs, was quoted as saying by CNBC. Iran, which is a member of Opec, accounts for as much as 4.0 per cent of global supply.

Swedish bank SEB has even warned that crude futures could rally to more than $200 a barrel in an extreme scenario of Israel targeting Iran’s oil facilities.

Energy analysts said an even more significant disruption to supply from the Middle East could lead to triple-digit oil prices. But analysts currently believe attacks on oil infrastructure in other producers in the region or the closure of the Strait of Hormuz are low-probability events.

They said that oil markets have remained unusually stable over the past year since the October 7, 2023 attacks by Hamas on Israel, “mainly due to the lack of any threat to the free flow of oil out of the Gulf. But the prospect of Israel launching a major retaliation that would target Iran’s oil production and export infrastructure has traders on higher alert.”

However, they argue that the Opec spare capacity, concentrated in Saudi Arabia and the UAE, would be enough to compensate for an Iranian loss of supply. “In theory, if we lost all Iranian production - which is not our base case - Opec+ has enough spare capacity to make up for the shock,” Amrita Sen, co-founder of Energy Aspects, said.

According to analysts, Saudi Arabia could be able to increase its oil production by about 3 million bpd and the UAE by 1.4 million bpd.

Iran currently produces around 3.5 million bpd, of which an estimated 1.0 million bpd are exported, mostly in China, which hasn’t stopped buying Iranian oil after the U.S. re-imposed sanctions on Iran's oil industry.

Analysts said one reason Opec+ would likely seek to fill any major gap in Iranian supplies is the probability that a major price spike would further slow economic growth in China and across the rest of the world, thus further slowing oil demand growth.

Energy analysts have questioned whether oil markets are being too complacent about the risk of a widening conflict in the Middle East, particularly given that the fallout could disrupt oil flows from the key exporting region.