Analysis: OPEC+ May Mitigate Iran Oil Shock, but Broader Disruptions Persist – Reuters

By Maha El Dahan, Ahmad Ghaddar, and Dmitry Zhdannikov

LONDON – OPEC possesses sufficient spare oil capacity to offset a complete halt in Iranian oil supply, should Israel target and disable Iran’s facilities. However, the organization may face difficulties if Iran retaliates by attacking the oil installations of neighboring Gulf states.

Following a series of Israeli airstrikes, Iran launched hundreds of missiles at Israel in a display of retaliation. In response, Israeli Prime Minister Benjamin Netanyahu declared that Iran had made a grave error and would face consequences, while Iran issued a warning of a substantial retaliation if confronted.

Options for Israel reportedly include striking Iranian oil production sites among other strategic locations. As an OPEC member, Iran produces approximately 3.2 million barrels of oil per day, accounting for about 3% of global output. Despite facing U.S. sanctions, Iranian oil exports have surged this year, nearing multi-year highs of 1.7 million bpd, primarily driven by demand from Chinese refiners, as China does not acknowledge unilateral U.S. sanctions.

Amrita Sen, co-founder of Energy Aspects, noted that “theoretically, if we lost all Iranian production—which is not our base case—OPEC+ has enough spare capacity to mitigate the shock.” OPEC+, which includes OPEC members and allies such as Russia and Kazakhstan, has been curtailing production in recent years to support prices amidst weak global demand, resulting in millions of barrels of spare capacity being available.

Current production cuts by OPEC+ total about 5.86 million bpd, with analysts estimating that Saudi Arabia could increase output by up to 3 million bpd and the United Arab Emirates by approximately 1.4 million bpd.

During a recent meeting, OPEC+ discussed their compliance with production cuts but did not address the ongoing Israeli-Iranian conflict. An insider mentioned that the only reference to the geopolitical situation was a desire for non-escalation.

Although OPEC has the capacity to replace potential losses in Iranian supply, much of this spare capacity is located in the Middle East Gulf region, which could be at risk if hostilities escalate further. Giovanni Staunovo, an analyst at UBS, cautioned that “effectively available spare capacity might be significantly reduced if energy infrastructure in the region is attacked,” suggesting that the West may need to utilize strategic reserves in case of major disruptions.

Despite the current tensions, Israel has opted not to strike Iranian oil facilities thus far. Analysts believe Israel may consider targeting Iran’s refining sites and the Kharg Island oil port, vital for the country’s crude exports.

Historically, during the Iran-Iraq War in the 1980s, attacks on oil tankers and threats against the Kharg Island terminal were common. Helima Croft from RBC Capital Markets pointed out that Iran and its allies might retaliate against energy operations in the region to shift the burden of conflict costs internationally.

A notable incident took place in 2019 when Iranian proxies executed a drone strike on Saudi oil processing facilities, temporarily crippling half of the nation’s crude output. Tamas Varga from PVM has indicated that in the event of escalation, Iran’s affiliates could launch attacks on Middle Eastern oil producers, particularly Saudi Arabia.

Since their political rapprochement in 2019, Riyadh and Tehran have managed to ease regional tensions, although their relationship remains challenging.

Oil prices have generally remained stable within a range of $70-90 per barrel, despite significant geopolitical issues such as the Russia-Ukraine conflict and ongoing unrest in the Middle East. An increase in U.S. oil production has contributed to reducing market volatility, according to Rhett Bennett, CEO of Black Mountain, which operates in the U.S. Permian basin.

The U.S. holds a 13% share of global crude production and nearly 20% of global liquid oil output, in contrast to OPEC’s 25% and OPEC+’s 40%. Bennett remarked that the diverse supply from U.S. sources, coupled with healthy spare capacity within OPEC, helps insulate the market from potential drastic supply shocks despite ongoing tensions in the Middle East.

However, any broad conflict in the region with a significant impact on oil production would likely lead to increased oil prices, subsequently raising fuel costs. A surge in gasoline prices could pose challenges for U.S. Vice President Kamala Harris in her upcoming campaign against Republican contender Donald Trump.

Warren Patterson from ING suggested that the United States would likely encourage Israel to exercise restraint in its military response in order to prevent significant escalation of tensions.