BY AHMAD GHADDAR AND SEBER DAREEN
LONDON — Oil market participants have switched to dreading a shortage in fuel from focusing on impending oversupply in just two days this week.
After Israel attacked Iran and Tehran pledged to retaliate, oil prices jumped as much as 13 percent to their highest since January as investors price in an increased probability of a major disruption in Middle East oil supplies.
Part of the reason for the rapid spike is that spare capacity among OPEC and allies to pump more oil to offset any disruption is roughly equivalent to Iran’s output, according to analysts and OPEC watchers.
Saudi Arabia and the United Arab Emirates are the only OPEC+ members capable of quickly boosting output and could pump around 3.5 million barrels per day (bpd) more, analysts and industry sources said.
Iran’s production stands at around 3.3 million bpd, and it exports over 2 million bpd of oil and fuel.
There has been no impact on output so far from Israel’s attacks on Iran’s oil and gas infrastructure, nor on exports from the region.
But fears that Israel may destroy Iranian oil facilities to deprive it of its main source of revenue have driven oil prices higher. The Brent benchmark last traded up nearly 7 percent at over $74 on Friday.
An attack with a significant impact on Iranian output that required other producers to pump more to plug the gap would leave very little spare capacity to deal with other disruptions – which can happen due to war, natural disasters or accidents.
And that with a caveat that Iran does not attack its neighbors in retaliation for Israeli strikes.
Iran has in the past threatened to disrupt shipping through the Strait of Hormuz if it is attacked. The Strait is the exit route from the Middle East Gulf for around 20 percent of the world’s oil supply, including Saudi, UAE, Kuwaiti, Iraqi and Iranian exports.
Iran has also previously stated that it would attack other oil suppliers that filled any gap in supplies left due to sanctions or attacks on Iran.
“If Iran responds by disrupting oil flows through the Strait of Hormuz, targeting regional oil infrastructure, or striking US military assets, the market reaction could be much more severe, potentially pushing prices up by $20 per barrel or more,” said Jorge Leon, head of geopolitical analysis at Rystad and a former OPEC official.
The abrupt change in calculus for oil investors this week comes after months in which output increases from OPEC and its allies, a group known as OPEC+, have led to investor concern about future oversupply and a potential price crash.
Saudi Arabia, the de facto leader of OPEC, has been the driving force behind an acceleration in the group’s output increases, in part to punish allies that have pumped more oil than they were supposed to under OPEC+ agreements.
The increases have already strained the capacity of some members to produce more, causing them to fall short of their new targets.
Even after recent increases, the group still has output curbs in place of about 4.5 million bpd, which were agreed over the past five years to balance supply and demand.
But some of that spare oil capacity – the difference between actual output and notional production potential that can be brought online quickly and sustained – exists only on paper.
After years of production cuts and reduced oilfield investment following the COVID-19 pandemic, the oilfields and facilities may no longer be able to restart quickly, said analysts and OPEC watchers.
Western sanctions on Iran, Russia and Venezuela have also led to decreases in oil investment in those countries.
“Following the July hike, most OPEC members, excluding Saudi Arabia, appear to be producing at or near maximum capacity,” J.P. Morgan said in a note.
Outside of Saudi Arabia and the UAE, spare capacity was negligible, said a senior industry source who works with OPEC+ producers.
