Israel-Iran war threatens chaos in oil and gas markets
Oil refineries, gas export terminals, and pipelines have been damaged by missile strikes in the Israel-Iran conflict. War in the Middle East could spread chaos and volatility.
Israel launched airstrikes on multiple Iranian military and nuclear facilities on June 13th, continuing to bomb Tehran and other critical sites in the country in the ensuing days. Iran has responded with missile launches at Israel. The Israel-Iran war drove up crude oil prices, raising fears of major global supply outages.
Oil prices initially spiked by more than 15 percent, although the price increases retreated after the initial air assault did not impact energy infrastructure. Prices closed on Friday up 7 percent, surging back into the $70s per barrel.
“Israel’s strike is a shift in regional dynamics and has pushed the oil risk premium to $8 per barrel,” Rystad Energy’s Head of Geopolitical Analysis Jorge León, said in a statement on Friday.
Shortly after Israel’s attack on Iran, Israel suspended gas production at offshore fields in the Mediterranean after it attacked Iran. Egypt and Jordan, which import gas from Israel’s offshore fields, reported supply disruptions.
“The resulting suspension of production at two of Israel’s three offshore gas production platforms is BULLISH for LNG prices – initially on sentiment, and if extended, because of the resulting extra demand pull from Egypt and Jordan as they seek to replace Israeli pipeline imports,” S&P Global Commodity Insights wrote in a note.
Over the weekend, Israel attacked gas facilities on Iran’s side of the South Pars gas field, the largest gas field in the world (it shares South Pars with Qatar). Drone strikes forced Iran to partially suspend gas production, impacting at least 12 million cubic metres of production. The bombing demonstrated that Israel has not confined its attack to just nuclear sites but is aiming at a broader assault on Iran, potentially seeking to topple the regime.
Oil sites were hit as well. Israel also bombed Iran’s largest oil refinery over the course of two days, killing at least three people. The refinery was at least partially knocked offline.
Tankers that load oil at Iran’s Kharg Island, which exports most of Iran’s 1.5 million barrels per day of exports, delayed their arrival, according to the WSJ.
Iran responded with waves of missiles, hitting the centre of Tel Aviv. Iran’s missiles hit an Israeli oil refinery in Haifa, damaging an oil pipeline and a power plant. The facility has reportedly shut down.
Oil analysts often worry about a worse-case scenario for global energy markets — the risk of a disruption or blockage of the Strait of Hormuz, through which 21 million barrels of oil and refined products pass each day. A disruption would send oil prices skyrocketing. But the risks of such a scenario remain low, Rystad said.
“If Iran were to attempt a full-scale blockade of the Strait, it would likely face strong international pushback, particularly from GCC countries, and even Iran’s key ally, China, would be hit hard by higher oil prices. Such a move would isolate Iran politically and economically,” Rystad analysts noted. Still, even a low risk of such a scenario playing out can drive up oil prices.
The cost of freight for very large crude carriers (VLCCs) coming out of the Middle East surged by 60 percent, according to Argus.
The nightmare scenario of a closure of the Strait of Hormuz would also apply to gas markets. Around a fifth of global LNG travels through the narrow passage, most of it from Qatar.
“Any disruptions to these flows could significantly affect global natural gas prices, potentially pushing them into uncharted territory, akin to the price shocks experienced in 2022 following Russia’s invasion of Ukraine,” J.P. Morgan wrote in a note to clients, although the bank added that the probability is “extremely low.”
Iran exported 18 billion cubic metres of gas in 2022 and 16 bcm in 2023, according to J.P. Morgan. Iran sent 7 bcm by pipeline to Turkey in 2024.
“Should these flows be disrupted, Turkey may need to turn to the global LNG market for alternative volumes, equivalent to up to 1% of estimated 2025 LNG demand, exerting moderate upward pressure on global LNG prices.” J.P. Morgan analysts wrote in a note.
De-escalation
Iran has told officials from other Gulf States that it wants de-escalation, and would return to the negotiating table as long as the U.S. did not join in on the attacks, according to the Wall Street Journal.
The news that Iran was seeking a negotiation caused oil prices to fall by 3 percent in early trading on Monday. The International Energy Agency said it was ready to release oil from storage if it is needed to offset any shortages.
For now, outages to oil and gas flows are minor. An FT analysis using satellite data finds that, so far, there has been no disruption in ship traffic through the Strait of Hormuz.
But it is still early days. With Israel having already destroyed much of Iran’s ability to fend off air strikes, there is little stopping Israel from continuing its war. On Sunday, Israeli Prime Minister said that “regime change,” while not his primary objective, may occur as a byproduct of the campaign to cripple Iran’s ballistic missile capabilities and its nuclear programme. Reuters reported that President Trump vetoed an Israeli plan to assassinate Iran’s Supreme Leader Ayatollah Ali Khamenei. On Monday, Netanyahu did not rule out going forward with such a plan.
“It still looks to us like upside risks outweigh downside risks,” ClearView Energy Partners, a Washington-based energy consultancy, wrote in a research note on Monday, commenting on the impacts to oil markets. ClearView said that “escalation catalysts” included Israel potentially targeting Iranian production and export sites, the U.S. entering the war as a combatant, or Iranian retaliation on U.S. forces in the region.
In a prior note, ClearView said that the closure of the Strait of Hormuz could drive up oil prices by $8.25 to $31.25 per barrel, but it offered a caveat that modelling might not be able to capture the potential chaos that would ensue.
The war is a reminder of the outsized role that the Middle East plays in global energy supplies, especially for countries highly dependent on fossil fuel imports. Intense price swings and volatility are routine in oil and gas markets, but the gyrations are magnified during periods of conflict. Countries highly dependent on imported oil and gas are particularly exposed to instability.
In response to Russia’s invasion of Ukraine in 2022, prices for oil and gas spiked, pushing up global inflation. While painful, it also accelerated the transition to renewable energy, especially in China and Europe. Doubling-down on a fast transition could reduce exposure to oil and gas volatility, at a time when war in the Middle East risks spilling out of control.
“There is a clear link between reducing exposure to fossil fuels and increasing resilience,” Zero Carbon Analytics wrote in a briefing. “Countries can reduce their exposure to fossil-fuelled inflation by replacing oil and gas use with electricity based on homegrown renewable energy.”
The International Energy Agency echoed that conclusion in a report last year, which details strategies on an affordable energy transition.
“The transition to a more electrified, efficient, renewables-rich energy system reduces exposure to volatility in fossil fuel markets,” the IEA wrote.
(Writing by Nick Cunningham; editing by Sophie Davies)