The shock attack by Hamas and Israel’s response risk a wider destabilization of the region — and the global oil market is watching.
There are sprawling questions about the geopolitical consequences of the conflict, which erupted 50 years after the Yom Kippur war that foreshadowed the 1970s oil crisis.
There is no suggestion that the fallout from the current situation will be comparable to what happened back then, but it could alter the geopolitical landscape of the Middle East in unpredictable ways. Israel has broadly pointed the finger at Iran following the attack. Tehran has denied involvement but President Ebrahim Raisi called it a “victory.”
Before the weekend, Saudi Arabia had been close to a deal with Israel that could have brought increased stability to the region. The US and Iran were engaged in broad but largely unacknowledged efforts to reach a kind of detente, and with it higher oil flows.
Many of the geopolitical considerations will hinge on how far Israel takes its response — particularly with regard to Iran. For now, these are the most immediate considerations for oil traders:
1. Sanctions Enforcement
There is a widely held belief in the oil market that the US has turned something of a blind eye to sanctions on Iran’s oil flows, allowing shipments to soar in recent months.
That has helped keep a lid on oil prices in a market that has seen a huge loss of supply from Saudi Arabia, Russia and the rest of OPEC+.
There is a chance that the US could take aim at this trade. The Islamic Republic currently sells the bulk of its crude exports to China, sending 1.5 million barrels a day — the most in a decade — in August, according to data intelligence firm Kpler.
It’s hard to be sure how much control the US can really exert. Since Iranian sanctions were re-imposed in 2018, sales to Chinese customers have increasingly been transacted in yuan, or via barter trade, and executed by local banks to circumvent western restrictions. Oil is transported on Iran’s own tankers or so-called dark fleet vessels, using a supply chain that US authorities can’t easily control.
Any outcome that cuts Iran’s oil flow could boost demand for Russia’s barrels — an undesirable outcome for Washington or other Group of Seven nations trying to cut Moscow’s access to petrodollars.
What’s more, any move to clamp down would tighten the oil market, a big decision to take going into an election year in the US.
2. Hormuz Disturbance
The Strait of Hormuz connects oil producing countries in the Persian Gulf to refineries all over the world.
It is a transit point for one in every six barrels that the world consumes, and a stretch of water over which Iran has often claimed dominion. It’s vital to the global energy market.
For now, there’s no sign Tehran is moving to disrupt merchant shipping — something it has done in recent times, often in tit-for-tat measures.
Hormuz has never truly halted. Not in the Tanker War of 1984 in which Iran and Iraq would routinely attack each other’s oil carriers, and not in more recent times when Tehran stepped up vessel seizures and harassment of merchant shipping.
Halting Hormuz hurts Iran’s allies. That doesn’t mean it can’t be significantly disrupted — even to the point of disrupting the flow of oil — but it’s hard to see it being fully stopped.
Beyond the strait, there have also been instances in recent years where Iran’s own oil shipments have been intercepted and disrupted by western powers — another source of potential disruption in an escalation.
3. How Wide?
The readout from the conflict for the oil market rests very much on what Israel does in the coming days, weeks and months.Iran is a “very big wild card” and there will a focus on how strongly Israeli Prime Minister Benjamin Netanyahu blames Tehran for facilitating the attacks, RBC Capital Markets LLC analysts including Helima Croft said in a note.
4. Strategic Releases
If the conflict ultimately spirals into something that affects oil supply, or boosts oil prices for a prolonged period, it would be a justification for the US government to further sell barrels from its Strategic Petroleum Reserve.
That could quell short-term oil price moves, but it would nevertheless leave the US needing to replenish its stockpile at some point in the future.
5. History as a Guide
For all of these risks, there is nevertheless a chance that this war ultimately proves to be immaterial for the oil market.
Turmoil in the region in recent times hasn’t been a catalyst for structural moves higher in oil prices. Traders want proof that the disturbances are material for supply. And usually, they aren’t.