Oil Prices at Risk: US-Iran Drone Attacks Threaten Supply
Global oil markets are facing renewed uncertainty as escalating tensions between the U.S. and Iran raise concerns about potential supply disruptions. Amid the conflict in the Middle East between Iran and the U.S, oil prices remain at risk. Recent events, including the Iranian drone and missile attack on Israel over the weekend, place additional stress on the oil markets. We believe the ample public and private spare capacity, coupled with a coordinated SPR release, would be enough to offset a moderate disruption.
The situation remains volatile, with potential for significant impact on oil prices. Iran launched a barrage of drones at Israel, officials said April 13, in a significant escalation of tensions in the oil and gas rich Middle East, after earlier impounding a tanker linked to Israel. This further amplifies existing anxieties.
The recent attack resulting in the deaths of three U.S. service personnel might be a black swan event destined to elevate geopolitical risk premium and hike oil prices. Global oil prices surged Friday, taking Brent crude to the highest levels in three months, as investors reacted to the killing of key Iranian military commander by a U.S. strike, underscoring the market's sensitivity to geopolitical developments.
Moreover, Oil prices settled 1% lower on Tuesday as investors worried about a supply glut after Iranian and U.S. delegations made progress in their talks and on expectations that global demand might not keep pace with existing supply. On the other side of the spectrum, Yemeni-based Houthi rebel groups are also contributing to the instability, further threatening vital shipping lanes.
The key question is the magnitude of potential disruption. If a major increase in risk in the Middle East as U.S. and Iran-backed attacks continue leads to a ‘large disruption’ (6 million bpd -8 million bpd) in oil supply then the World economy could face serious consequences. While we believe coordinated action and existing spare capacity could mitigate a moderate disruption, a larger crisis could send oil prices soaring.