
Israel's attack on Iran has sparked a conflict that is rattling the oil market as investors weigh the potential for it to engulf much of the Middle East, the source of about one-third of the world’s supply of the commodity.
Brent crude, the international benchmark, was up 7% on Friday to $74.23 per barrel after rising more than 10% shortly after the attack. Analysts say oil prices could surge to more than $100, and perhaps as high as $120, if the conflict grows substantially. That would cause gasoline prices and inflation to spike.
Whether that happens depends on how the war escalates. Israel didn’t directly strike Iran’s main oil-export hub, which sits on an island in the Persian Gulf, but some analysts expect Israel to hit those facilities if the war continues. Iran, for its part, is in position to disrupt oil shipments in the region, which could cause prices to spike even more.
Here is an analysis of why the stakes are so high, and how events could unfold, for Iran, Israel, the oil market, and for energy companies such as Exxon Mobil and U.S. shale producers.
What are Iran and Israel’s role in the oil market?
Iran produces about 3.2 million barrels of oil a day, and exports between 1.5 million and two million barrels of it. That is a significant piece of the 103 million barrels of global oil production, but not enough to completely disrupt the market. Israel isn’t a major player, historically pumping less than 10,000 barrels a day, though it does produce some natural gas.
How could Israel disrupt the market?
Israel could strike Kharg Island in the Persian Gulf, which houses much of Iran’s oil export infrastructure, although the U.S. would likely attempt to prevent that from happening.
An action like that is 'unlikely to gain favor with the US administration, which would be wary of disrupting oil markets,' J.P. Morgan strategist Natasha Kaneva wrote on Friday.
But if this conflict drags on, all bets are off.
"If this proves to be an extended military operation, it is conceivable that the Netanyahu government could seek to eliminate the primary source of funds for Iran’s proxy network and nuclear program," wrote RBC Capital Markets strategist Helima Croft.
How could Iran disrupt the broader oil market?
Iran has numerous ways to respond. It and the military groups it supports, including the Houthis in Yemen, could cause much wider disruption in the oil market.
After the Israel-Hamas war began in 2023, the Houthis attacked ships in the Red Sea—some of those carried energy products—causing a brief spike in the price of oil. But the Red Sea doesn’t transport that much oil.
The most important waterway is the Persian Gulf, which sits between Iran and Saudi Arabia and accounts for 30% of the world's seaborne oil trade.
Iran and its proxies could block the Strait of Hormuz, a narrow waterway that connects the Persian Gulf to the Gulf of Oman, and from there offers access to markets all over the world. China, which buys more of Iran’s oil than any other country, is particularly dependent on supplies that come through the strait.
What would happen to oil prices if the strait is blocked?
Prices would surge. It would have a big impact on some of the world’s most important oil exporters, including Saudi Arabia, which produces more than nine million barrels a day.
“We believe oil prices could quickly retreat if Iran’s response remains limited, but could surge beyond $100 per barrel if Iran moves to disrupt oil transit,” wrote CFRA analyst Stewart Glickman.
Financial firm Lazard believes that if the strait is blocked, oil prices could rise above $120, and the U.S. would likely have to get involved to reopen it.
Is a blockage of the strait a realistic scenario?
It has never happened before. Iran laid mines in the strait during the Iran-Iraq war in the 1980s, damaging at least one American ship. But Iran has never fully blocked the waterway, despite threatening to do so several times. Analysts still see a blockade as a remote possibility.
It is our understanding that it would be extremely difficult for Iran to close the strait for an extended period given the presence of the US Fifth Fleet in Bahrain," Croft wrote. "Nevertheless, Iran could still launch attacks on tankers and mine the strait to disrupt maritime traffic.
Lazard considers an extended blockade “highly unlikely due to catastrophic internal and international consequences and the ability of the US Navy to intervene to open up the Strait.”
Could Iran shake up the oil market in other ways?
Given its location and military capabilities, Iran could affect the market in several ways. Two Saudi Arabian oil facilities were damaged in military strikes in 2019, severely curtailing production, and Iran was believed to be behind the attacks.
Tensions between Saudi Arabia and Iran have eased since then, but Iran could widen the conflict again by hitting Saudi facilities.
Kaneva, the J.P. Morgan analyst, believes that a broader Middle East conflict would trigger an oil shock that could push prices above $120. According to how oil traders responded to the most recent escalation of the war, she thinks the market is indicating a 17% probability of a much more severe impact.
The geopolitical premium of oil—the price increase attributed to global conflicts—is between $5 and $10 today, said Kenneth Medlock, a professor at Rice University in Houston.
"But that 'could easily step into the double-digits' in the event of a longer conflict," he said.
It doesn't matter that Israel hasn't hit Iranian oil infrastructure yet.
It’s not necessarily about the physical flow right now," Medlock said. "It’s about the risk of flow tomorrow.
How could it affect the U.S.?
A wider war would certainly impact the U.S. American infrastructure in the Middle East may become a target for attacks. And it could have broad economic effects.
For one thing, gasoline prices will almost certainly rise because of the jump in oil prices. Patrick De Haan, the head of petroleum analysis at GasBuddy, thinks average prices could go up by 10 to 25 cents in the next few weeks. But a larger oil spike could cause more severe effects.
Kaneva from J.P. Morgan believes that if oil reaches $120, it would cause inflation as measured by the consumer price index to reach 5%, approximately double recent levels. She expects President Donald Trump to attempt to restrain a wider conflict, given his desire to keep gasoline prices low.
A rise in inflation would make the Federal Reserve far less likely to cut interest rates, as Trump has urged it to.
What about oil stocks?
Oil stocks were modestly higher on Friday. Exxon Mobil gained 2.2% and shale producer EOG rallied 3.9%.
Some analysts were cautious. The overall oil supply-demand picture is still bearish, with supply set to outpace demand this year. "We expect, absent a wider war, today's rise in prices will likely prove to be a sell-the-news event," wrote Morningstar analyst Allen Good.
But some investors think that the rise in oil prices and stocks indicates the value of including some energy sector companies in a diversified portfolio. Oil stocks were rising on Friday even as the broader market declined.
When tech stalls out there's a natural rotation to energy companies," said Jay Hatfield, portfolio manager of the InfraCap Equity Income Fund ETF. "They're actually pretty good hedges.
Hatfield includes Exxon and Chevron in the fund and believes they are good options for generalist investors who don't want to take the risk of buying smaller energy names.
Write to Avi Salzman at avi.salzman@barrons.com
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