As tensions rise following Iran’s missile strikes on Israel, what worries oil traders most is the potential for disruptions in Middle Eastern crude supplies — and in Iran, the Kharg Island export terminal could be a key target for the IDF.

“Kharg Island is where Iran loads the majority of its crude exports and if it is targeted it would be the most severe impediment to Iranian crude exports,” said Matt Smith, head of U.S. analysts at Kpler.

One factor exacerbating the rise in oil prices on Thursday was Biden, who said discussions were ongoing when asked by the media whether he supported Israel's attack on Iranian oil facilities.

Most of Iran’s crude oil exports are shipped through Kharg Island in the northeastern Persian Gulf, which is sometimes referred to as Iran’s “Oil Island,” according to the U.S. Energy Information Administration.

Gerard Filitti, senior legal counsel at the Lawfare Project, said an attack on the oil terminals on Kharg Island would be "most devastating because approximately 90% of Iran's global exports pass through these terminals." If that happened, he said, one could expect oil prices to "immediately spike by more than 10% and continue to rise."

Filitti added that repairing the facilities at Khark Island would take months even in the best-case scenario, and that while Iran has other terminals, those are too far away and too small to replace output from Khark Island. “The impact of a full-scale strike on Khark Island cannot be underestimated,” he said. It would be catastrophic for Iran’s economy, which relies on oil exports for dollars and access to global markets.

According to S&P Global Commodity Insights, Iran's oil production is expected to average 2.82 million barrels per day in 2023. The country's oil fields are estimated to hold 12% of the world's total oil reserves.

Iran’s crude exports this year are averaging nearly 1.5 million barrels per day (bpd) — almost half its oil production — while the country hopes to boost its oil production capacity to 3.9 million bpd by 2025, up from 3.4 million bpd this year, Smith said.

Smith said Israel’s threat to strike Iran’s oil infrastructure “is more of a warning shot at this point.”

Still, Simon Lack, co-manager of the Catalyst Energy Infrastructure Fund, said the oil market was probably close to pricing in a scenario in which an Israeli strike on Iranian infrastructure disrupted 1.5 million barrels per day of supply.

Lack added that OPEC members could increase production by about 500,000 barrels per day, while U.S. production could increase by 250,000 barrels per day. "So I think it's manageable."

Meanwhile, Smith said that if Israel were to target Iran's oil and gas infrastructure, the Abadan refinery near the Iraqi border could be a potential target. He said the facility accounts for 17% of Iran's refining capacity and 13% of its gasoline supply. "A strike against the refinery would hurt Iran in multiple ways - not only reducing its gasoline supply, but also freeing up its crude oil supply."

Simon Wong, research analyst at Gabelli Funds, said oil prices could rise in immediate response if Israel strikes Iran's oil export facilities or refineries. Brent crude prices could rise by $10 to $15 a barrel due to disruptions in Middle East oil flows, Wong said, adding: "The next development depends on how Iran responds."

Wong also said that oil export facilities are not the only possible targets Israel could target inside Iran. Other targets include nuclear facilities, refineries and air defense facilities.

The flow of oil through the Strait of Hormuz, a narrow waterway next to Iran that is vital to global oil supplies, is also key.

Rob Thummel of Tortoise, who manages the Tortoise Energy Infrastructure Return Fund, said if the strait closure temporarily cut global oil supply by 20%, it would cause a "temporary spike" in oil prices - perhaps to more than $100 a barrel.

However, Thummel stressed that the United States is well aware of the importance of the Strait of Hormuz and will likely do everything it can to keep the strait open.

Article forwarded from: Jinshi Data