Concerns that Iran could destabilize the global oil markets waned on Monday as the country’s retaliatory strikes on the United States broadly signaled that the regime wishes to de-escalate the Middle Eastern conflict.
Tensions remain high, however, and analysts warn that Iran could take steps that would still place upward pressure on prices without jeopardizing its revenue and supply chain.
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Iran is one of the top 10 oil producers worldwide and sits along the narrow Strait of Hormuz. This water route is critical to the global transportation of crude oil, as roughly one-fifth of global daily oil production passes through the strait every day.
Shutting the strait
Following the U.S.’s attack on three nuclear sites in Iran on Saturday, fears grew that the country could strangle transportation through the strait, disrupting global trade and causing oil prices to soar.
Several U.S. officials have publicly called on Iran to avoid taking the drastic action, indicating that the regime would be faced with stronger retaliation from Western producers and importers that rely on the strait for supply.
“It would be a suicidal move on their part because the whole world would come against them if they did that,” Secretary of State Marco Rubio said on CBS News’s Face the Nation on Sunday.
Last week, JP Morgan estimated that if Iran were to close the Strait of Hormuz, in what it described as a worst-case scenario, the price of oil could hit as high as $130 per barrel. While that would hurt the global market, it would also come at a cost to Iran.
Oil market analysts have pointed out that the country relies heavily on the strait for its own supply and demand of crude.
“They need oil revenue to fund their operations,” Susan Bell, senior vice president of downstream research with Rystad Energy, told the Washington Examiner.
“I think that it would make sense that they would not want to risk their own supply, because that’s revenue for their nation,” she added.
Asian powers such as China are predicted to strongly oppose a complete shutdown of the water route, as they heavily rely on the passageway for imports. Analysts say Iran would risk alienating China, its largest customer, if it took such a step.
Tightening control
Vessels carrying crude continued to pass through the Strait of Hormuz on Monday, indicating that shippers were confident that Iran would not pursue a complete closure of the waterway.
The door is still open, though, for the country to put pressure on ships passing through or in nearby regions.
Hunter Kornfeind, an analyst with Rapidan Energy Group, told the Washington Examiner that Iran could move to target, harass, or hijack tankers sailing in the Persian Gulf, deterring vessel traffic away from the strait.
This could be seen through cyberattacks, GPS interference, or other attempts at increasing operational risks for vessels looking to sail through the strait.
Bell said Iran can be an “annoyance” to oil tankers looking to pass through, or even limit transit to those carrying Iranian crude.
“Can they be a deterrent that forces vessel operators to not want to transit the Strait of Hormuz? Yes, absolutely … how long that will last is what sort of remains the wild card,” Bell said.
Bell said that Iranian harassment of tankers would also affect shipments of liquefied natural gas from Qatar and diesel fuel from the Middle East to Europe.
Clearview Energy Partners managing director Kevin Book said such actions would prompt retaliation or alienate some of the market.
Book told the Washington Examiner that even threatening a possible disruption in the water route could temporarily affect the market.
Effect on the US
Any disruption to flows through the strait — whether complete or partial — is expected to trigger sharp price hikes for oil and LNG.
This upward pressure would likely lead to higher prices for Americans at home, including on energy bills or at the pump.
Though, unlike the 1970s energy crisis, the U.S. would be a bit more insulated from the sharp effects of product shortages and elevated prices. This is in large part thanks to increased reserves and supply of oil and natural gas.
“The U.S. is not nearly as dependent on imported oil as it was back in the 70s,” Bell said.
Still, Bell said, the oil market is intertwined globally, meaning that domestic benchmark prices would still rise if the Middle East conflict caused a supply shortage.
Similarly, if international diesel prices were to rise because supplies to Europe were cut off, domestic prices would likely also increase, as the U.S. would ramp up its exports to Europe to fill the gap.
She compared it to similar price hikes seen during the summer of 2022, following Russia’s invasion of Ukraine, when gas prices peaked at more than $5 per gallon.
“Generally speaking, we would see higher petroleum product prices in North America, in the U.S., because of this impact,” Bell said.
Fluid tensions
It remains to be seen whether Iran will take action to place strain on the Strait of Hormuz, as many believe the country is seeking to de-escalate the conflict.
Iran retaliated against the U.S. on Monday by launching a strike against a U.S. military base in Qatar. As the strike inflicted minimal damage on U.S. infrastructure in the region, analysts have taken it as a sign that Iran is choosing not to strike harder.
Oil prices dramatically fell on Monday as a result, with both Brent Crude and West Texas Intermediate dropping by more than 8%. At around 4:30 p.m. EST, Brent Crude was priced at around $70.24 per barrel. It had peaked near $80 in early trading before the retaliatory strike.
Kornfeind told the Washington Examiner that the market reaction isn’t entirely surprising, as there has been no evidence of Iran moving to disrupt oil trade in the region.
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For Bell, all signs point to Iran avoiding a complete closure.
“I think the risk is too great for them to do that,” Bell said.