OPEC+ Can Offset Iran Oil Supply Disruption, But Wider Conflict Poses Risks
As tensions between Israel and Iran escalate, concerns are growing over the potential impact on global oil supplies, Reuters reports.
While OPEC+ has enough spare capacity to compensate for a complete loss of Iranian oil, a broader conflict could destabilize the region and strain global energy markets.
The conflict intensified when Iran launched hundreds of missiles at Israel in response to recent Israeli airstrikes. Israeli Prime Minister Benjamin Netanyahu warned of severe consequences, raising fears that Israel could target Iran’s oil production facilities. Iran, an OPEC member, currently produces around 3.2 million barrels per day (bpd), accounting for 3% of global oil output.
Despite US sanctions, Iranian oil exports have surged this year, reaching nearly 1.7 million bpd, with most of the supply going to China. If Israel were to strike Iranian oil facilities, OPEC+—a group that includes OPEC members and allies like Russia—could potentially make up for the shortfall.
“In theory, OPEC+ has enough spare capacity to handle a total loss of Iranian production,” said Amrita Sen of Energy Aspects.
OPEC+ currently holds over 5 million bpd of spare capacity, mainly due to production cuts aimed at stabilizing prices amid weak global demand. However, much of this spare capacity is located in the Gulf region, which could be vulnerable if the conflict spreads. Giovanni Staunovo, an analyst at UBS, warned that renewed attacks on energy infrastructure in the region could significantly reduce available spare capacity.
If Iran retaliates by targeting energy operations in neighboring Gulf countries, such as Saudi Arabia, the broader Middle East could become embroiled in the conflict, threatening global oil production. In the past, Iran’s proxies have attacked key energy infrastructure, including a 2019 drone strike on Saudi oil facilities that temporarily disrupted 50% of the kingdom’s crude output.
Analysts have also pointed out that if the conflict leads to a significant reduction in global oil supplies, prices would rise, potentially driving up gasoline costs. This could have political implications in the US, where higher fuel prices might impact Vice President Kamala Harris’s campaign against Donald Trump in the upcoming presidential election.
Although oil prices have remained relatively stable, trading between $70-90 per barrel despite conflicts in Ukraine and the Middle East, the potential for a broader regional conflict could push prices higher. Brent crude futures rose 1.38% to $74.92 per barrel on Thursday, while US West Texas Intermediate futures increased 1.57% to $71.20.
The US has also ramped up its crude production, contributing 13% of global output, which has helped offset some of the market’s fear of a major supply disruption. Combined with OPEC’s spare capacity, these factors have provided a buffer against immediate shocks, said Rhett Bennett, CEO of Black Mountain.
However, analysts remain cautious as they wait to see Israel’s next move. While no Iranian oil facilities have been targeted so far, the potential for escalation remains high.
“Preclusion of any Middle East conflict is a mistake, and the market remains defensively positioned,” said John Evans, an analyst at PVM.
