Oil and gas markets are now staring at what could become the largest supply disruption in modern history as the war between the United States and Israel against Iran spills into core Gulf energy infrastructure.
What began as strikes on military targets has escalated.
Energy facilities in Saudi Arabia and Qatar have been hit and tanker traffic through the Strait of Hormuz has collapsed.
S&P Global Energy Commodities at Sea data shows that on March 1 only five oil tankers transited the Strait compared with around 60 per day recently.
Up to 20.8 million barrels per day of crude oil and products move through the Strait, with 15.4 million b/d of that crude. About 20% of global LNG flows through the same chokepoint. If tankers halt, as much as 15 million b/d could be at risk, even after accounting for limited bypass pipelines in Saudi Arabia and the UAE.
Jim Burkhard, Vice President and Global Head of Crude Oil Research at S&P Global, said: “The duration of the war is critical. If the reduction in tanker traffic continues for a week or so it will be historic. Beyond that it would be epochal for the oil market with prices rising to ration scarce supply and impacts in financial markets.”
He added: “While not certain, the risk is real. The potential impact on global oil supply and the world economy could be so significant that it is difficult to imagine a worst-case scenario—no tankers transiting the Strait of Hormuz—lasting more than a short while but it could.”
Before hostilities, global oil markets were expected to be in surplus. Now analysts warn the balance could flip sharply into deficit, pushing prices high enough to ration demand.
Oxford Economics takes a more measured view.
“We think higher energy prices from a moderate disruption in the Strait of Hormuz would only knock 0.1ppt off world GDP growth this year. Iran would likely struggle to keep the Strait closed for long, a period of lower-level disruption to trade flows for up to a couple of months is more plausible,” wrote Chief Global Economist Ryan Sweet and Ben May, Director of Global Macro Research.
They estimate oil could average almost $80 (£63) per barrel in the second quarter before easing back towards a little more than $60 (£47) later in the year, with gas prices rising sharply in the interim.
They also warn: “The duration of the conflict and the nature of any regime change in Iran is key to understanding the economic impact, but these remain highly uncertain. There’s a risk that events in the Middle East prompt a more pronounced spike in energy prices or significant adverse financial market reactions across the globe.”
Morningstar DBRS predicted it was too early to work out how crude prices will fare but also pointed out the blocking of the Strait would have huge impacts if it went on for long.
Ravikanth Rai, Associate Managing Director of Energy & Natural Resources Ratings at Morningstar DBRS. “We believe there is too much uncertainty to determine if crude oil prices will remain high, it is largely dependent on how the conflict plays out. As such, there is no change to our midcycle pricing assumptions, so we are not currently contemplating any credit rating actions.”
For the UK, the political reaction has been swift. GMB General Secretary Gary Smith said:
“The escalating conflict in the Middle East shows it’s absolutely vital that the UK has a secure domestic oil and gas supply. The Government must grasp the nettle and act to ensure our oil and gas policy helps protect the UK from global turbulence.”
If tanker flows remain restricted, the consequences will not be confined to the Gulf.
Higher crude and LNG prices will feed directly into petrol forecourts, industrial energy bills and inflation.
What began as a regional conflict now risks becoming a global energy shock.
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