Eyes are on Israel and Iran as the conflict enters its fourth day with no signs of slowing down. With Iran’s energy infrastructure also in the crosshairs, global oil markets are already starting to feel the effects of the attacks.
Oil prices early this week stabilized after volatility over the weekend, but it remains to be seen how the conflict will impact oil flows over the long term, especially if hostilities escalate.
Matt Smith, energy analyst for Kpler, spoke with the Texas Standard about what the unrest could mean for U.S. energy producers. Listen to the interview above or read the transcript below.
This transcript has been edited lightly for clarity:
Texas Standard: Talk us through the latest attacks over the weekend. What effects have they had on energy infrastructure?
Matt Smith: So first of all, these two countries have been long-standing enemies. But in this current juncture, Israel is targeting nuclear facilities because it is concerned that Iran’s fuel enrichment is progressing to the point where they have nuclear weapons.
But Israel over the weekend has not just been targeting nuclear sites, but also military figures and scientists. It’s killed a number of key players in Iran there. But it’s also targeting energy infrastructure such as oil and fuel storage, as well as the South Pars natural gas field. It’s targeted that. That’s the largest gas field in Iran there.
And so it’s trying to cripple Iran’s capabilities on the nuclear side of things, but also potentially stoke unrest within the country by targeting fuel storage there. So Israel is essentially attacking Iran to leave it immobile across a number of fronts.
So what happens if these tit-for-tat attacks continue to escalate?
Well, we are seeing Iran responding by sending waves of missiles back at Israel there.
But ultimately, the concern from an energy perspective is that Iran tries to block the Strait of Hormuz, which is essentially the exit from the Mideast Gulf there, because we see a third of waterborne crude exports pass through there. It’s about 15 million barrels per day. It’s actually an additional 5 million barrels a day of liquid petroleum gas and also clean products. So it’s a huge amount. It’s a key choke point on a global basis.
But it seems unlikely that they would be able to close this or impact it for that long because there is already a naval presence there. And we’re already hearing reports that the U.S. and UK are sending more vessels there into the Mideast Gulf to act as a further deterrant.
So what does all this do to oil prices and what do we think is likely to happen going forward? Do you think we’re going to see some type of de-escalation?
Well, you saw this immediate knee-jerk reaction, which is only natural when you see two countries essentially starting war, it would seem.
And so we saw prices rising in terms of double digits on a percentage basis on Friday, but actually we’ve been dropping today. We’re seeing some of that given back. So despite the weekend’s escalation, prices are now rolling over and selling off because we haven’t seen any disruptions from an energy perspective to those flows through the Strait of Hormuz.
In terms of the de-escalation side of things, ultimately this could lead to Iran coming back to the negotiation table for nuclear talks because the cancelation of these talks really has been the reason that we’ve had Israel striking them in the first place. So that could be the one positive thing that comes out of this.
Well, you mentioned a couple numbers there when it comes to Iranian crude production and exports. I mean, if, I guess, worst-case scenario, all this were taken offline, what would happen? Who would be affected most?
In terms of Iran… So Iran produces about 4 million barrels a day, so that puts it well easily in the top 10 of the largest oil producers in the world. So any impact there will have a global ripple effect.
They also export about 1.7, 1.8 million barrels per day of crude, and so that would have an impact. All of that pretty much goes to China, so China would be the most impacted by this.
They wouldn’t want to perhaps close the Strait of Hormuz because they’d be cutting off their nose to spite their face because they wouldn’t be able to get that revenue from China.
So we talk about how lower oil prices mean lower prices at the pump. Who is the ultimate beneficiary in the U.S. from this current rally in oil?
So this is actually giving U.S. producers a great opportunity here to hedge their production into the future.
You know, we’ve talked previously, just in the last month or so, about how low oil prices are impacting U.S. production. But this gives them this opportunity to get in and hedge that production at a higher price.
And so because of this event over the weekend, we could see high U.S. oil production in the next 6, 9, 12 months than we otherwise would have seen.
Are we seeing this reflected at the pump just yet?
Not quite, and perhaps we may not see too much of an impact just because we are seeing prices drop. And we didn’t see gasoline prices rally as much as we did see oil prices rally.
But because of that upside, you’re likely to see some bump reflected through there. But hopefully it’s not going to be anything too crazy, particularly if we see oil price continuing to sell off here.
