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

Oil markets have remained unusually stable over the past year

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.

Analysts at Goldman said their upward price projection is based on the assumption that the Opec+ group would not respond to a potential disruption to supply from Iran by boosting production,

Goldman’s Struyven noted that if Saudi Arabia and the UAE, increase output and offset some of the potential losses from Iran, oil prices could rise more modestly, and the impact could be slightly less than $10 barrel.

Oil prices have climbed so far this week, with traders worried that Israel may decide to hit Iran's oil infrastructure in retaliation to Tehran's missile attack - but the market has a not-so-secret cushion that could help offset any loss of output.

"Opec+ has 5.8 million bpd [barrels per day] spare capacity to compensate for Iran's 1.7 million bpd of discount sanction barrels," said Robert Yawger, director of energy futures at Mizuho Securities USA.

The group, comprising the Organization of the Petroleum Exporting Countries and its allies, was already preparing to lift output in less than two months. The group has plans to gradually phase out voluntary production cuts of 2.2 million bpd, with the reinstatement of 180,000 bpd beginning in December.

It made that decision in early September, before Iran's missile attack on Israel raised the risk of production and supply disruptions in the Middle East.

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.