A report in Reuters said that OPEC (the oil exporting countries) possesses sufficient surplus oil capacity to compensate for the absence of all Iranian supplies if Israel strikes that country’s facilities, but the organization’s production may face difficulties if a comprehensive war breaks out in the region.
Iran launched a barrage of missiles at Israel on Tuesday in response to air strikes and Israeli attacks on Iran’s allies in the region. Israeli Prime Minister Benjamin Netanyahu said that Iran had made a grave mistake and would pay the price for it, while Iran threatened a crushing response if Israel attacked it.
Israel options
The American news website Axios quoted Israeli officials as saying that Israel’s options include targeting Iranian oil production facilities and other strategic sites.
Iran is a member of OPEC and its production is about 3.2 million barrels per day, equivalent to 3% of global production.
Iran’s oil exports rose this year to their highest levels in several years to 1.7 million barrels per day, despite US sanctions. Chinese refineries buy most of these supplies, and Beijing says it does not recognize unilateral sanctions.
“In theory, if we lose all of Iranian production, which is not our basic assumption, OPEC+ has enough spare capacity to absorb the shock,” says Energy Aspects co-founder Amrita Sen.
The OPEC Plus alliance – which includes OPEC and allies outside it, including Russia and Kazakhstan – has been reducing production for years to support prices in light of weak global demand.
The total cuts implemented by OPEC Plus producers currently amount to 5.86 million barrels per day, and analyst estimates – according to Reuters – indicate that Saudi Arabia is able to increase production by 3 million barrels per day, and that the UAE can increase by 1.4 million barrels per day.
OPEC Plus countries held a meeting on Wednesday to discuss commitment to production cuts, and OPEC Plus sources said that the alliance did not address the conflict between Israel and Iran.
Reuters quoted an OPEC Plus source familiar with the discussions as saying: “The only thing that was mentioned related to the geopolitical situation and the conflict was the expression of hope for non-escalation.”
Excess capacity
UBS analyst Giovanni Stanovo said that while OPEC has enough spare capacity to compensate for the exit of Iranian supplies, most of this capacity is in the Gulf region in the Middle East and may also be at risk if the conflict escalates.
He pointed out that “the actual available spare capacity may be much less if attacks on energy infrastructure in countries of the region are renewed,” adding that the West may have to resort to strategic reserves if severe disturbances occur, according to what Reuters reported.
Israel has not yet attacked Iranian oil facilities, and oil sector analysts and security experts say that Israel may target Iranian oil refining sites and the oil port on Kharg Island, the outlet for about 90% of the country’s crude oil exports.
During the Iran-Iraq war in the 1980s, Baghdad attacked oil tankers around Kharg Island on many occasions and threatened to destroy the oil port, a Reuters report states.
The agency also quoted Helima Croft of RBC Capital Markets as saying: “Iran and its proxies may target energy operations in other parts of the region if the current crisis turns into an all-out war in order to internationalize prices,” referring to the creation of a global energy crisis.
In 2019, an attack by marches from the Houthi group in Yemen on oil processing facilities in Saudi Arabia briefly disrupted 50% of the Kingdom’s crude oil production.
Oil prices have remained in a range between $70 and $90 per barrel over the past years, despite the war between Russia and Ukraine and the conflict in the Middle East.
The Reuters report says that the outbreak of any large-scale conflict in the Middle East, followed by a major impact on production, will inevitably push oil prices to rise.
