Potential Disruptions to Oil Exports from Iran May Be Overstated

LONDON - Recent military actions involving the U.S. and Iran have heightened tensions in the Middle East, particularly concerning the potential for disruptions to oil and gas exports. The escalating conflict raises concerns about energy price surges, but historical evidence suggests that any significant disruption might be temporary.

Following a series of surprise airstrikes by Israel on Iranian targets, which began on June 13, investors have been closely monitoring developments in the region. The Strait of Hormuz, a critical maritime passageway for about 20% of the world's oil and gas, remains a focal point for these concerns. Since the onset of hostilities, benchmark Brent crude prices have surged over 10%, surpassing $77 per barrel.

In response to U.S. strikes on key Iranian nuclear facilities, Iran might consider retaliatory actions that could include targeting U.S. interests in the region or disrupting oil exports. While any such retaliation could likely result in a sharp increase in energy prices, the historical context suggests that substantial disruptions are often short-lived.

The capacity of Iran to significantly disrupt or close the Strait of Hormuz is a critical question. Iran possesses the means to lay mines or seize vessels within the Gulf, tactics it has employed in previous conflicts. While the strait has seen disruptions before, it has never been completely blocked. Historical incidents, such as the Tanker Wars during the Iran-Iraq conflict in the 1980s, illustrate the potential for maritime disruptions, yet these incidents were met with responses that limited their long-term impact.

For example, during the Iran-Iraq War, both sides engaged in attacks on commercial shipping, prompting international military interventions. Notably, the U.S. Navy's Operation Earnest Will in the late 1980s aimed to protect oil tanker convoys, underscoring the strategic importance of ensuring safe passage through the Strait of Hormuz.

Recent skirmishes, such as the seizure of the Advantage Sweet tanker by Iranian forces in April 2023, serve as reminders that tensions in the region can escalate quickly. However, these events have not resulted in sustained maritime disruptions, largely due to the potential for a rapid military response from the U.S. Navy.

Historical data shows that severe disruptions to global oil supplies tend to be fleeting. For instance, the Iraqi invasion of Kuwait in 1991 caused a spike in oil prices, but prices returned to pre-invasion levels relatively quickly following military intervention. Similarly, during the lead-up to the second Gulf War in 2003, oil prices surged but fell back down shortly after the onset of military operations. The rapid price fluctuations seen during Russia's invasion of Ukraine in 2022 further illustrate how quickly markets can stabilize after initial shocks.

Current global oil markets do maintain significant spare capacity, with OPEC+ countries holding around 5.7 million barrels per day in excess capacity. This surplus, combined with existing production capabilities in Saudi Arabia and the UAE, could help mitigate the impact of any disruptions.

Saudi Arabia, for example, has established a pipeline that allows it to bypass the Strait of Hormuz, while the UAE has a pipeline that connects its oil fields to the Fujairah oil terminal. However, these alternative routes are not without risks, as they could be vulnerable to attacks from regional adversaries.

It is worth considering that Iran may opt not to escalate tensions further, recognizing that any severe disruption to the Strait of Hormuz would also impact its own oil exports. Consequently, Tehran might choose to engage in diplomatic negotiations rather than resort to military provocations.

As energy markets react to ongoing tensions and potential military actions, the likelihood of a persistent supply shock remains low, based on historical precedence. Investors should remain vigilant but cautious, as the fear of disruptions may be more pronounced than the actual risk.