Dan Marks comments on oil markets after the Israeli strikes on Iran

“It is not surprising that oil prices have jumped in response to Israel’s strikes on Iran. Iran has limited options to respond and the extent of Israel’s escalation, particularly the targeting of the Islamic Revolutionary Guard Corps leadership, increases the risk of Iran targeting oil shipping through the Strait of Hormuz or oil infrastructure in the region. However, Iran’s inability to prevent Israeli air strikes and its weakening geostrategic position, as well as fear of bringing the United States or other actors into the conflict, may limit appetite in Iran for targeting oil markets.

Weak demand and the availability of spare capacity from Saudi Arabia and the UAE have insulated oil markets from the geopolitical environment to an extent in recent years. But the risk of spillover from escalating conflict between Israel and Iran will erode this, with Iran having demonstrated the ability to strike oil infrastructure on the Arabian peninsula. While Saudi Arabia and the UAE have some capacity to bypass the Strait of Hormuz, this is limited and Iraq, Kuwait, Qatar, and Iran itself are heavily dependent on shipping through the strait, around 6 million bbl/d in 2023.

Energy efficiency and electrification remain the most effective means in the short term of reducing exposure to geopolitical risk to oil prices emanating from the Middle East and Russia. Longer duration term-contracts can provide some insulation but this is typically partial, with prices generally indexed to global markets. Over the longer-term, should investment in new oil exploration and production decline, rising concentration of the oil market could increase price volatility and exposure to geopolitical shocks.”