OPEC+ keeps wary eye on potential Israeli response to Iranian air strikes

Crude prices have risen for the past several weeks as production cuts by OPEC and its allies have taken root and tightened market balances.

Now, Israel's potential response to Iran's barrage of drones and missiles -- almost all of them intercepted -- could upset the producer group's hard-won gains, as it braces for any escalation of hostilities in the Middle East.

"The aftermath of the Iranians' attack will be crucial," one OPEC delegate said on condition of anonymity. "If Israel decides to over-escalate, it will be a troublesome situation."

Another source from the producer bloc downplayed the risks, pointing to the statement on X by the Iranian permanent mission to the UN that the launch was, for now, a one-off, unless Israel returns fire.

"A direct Iranian attack on Israel is very alarming, especially for the oil market," said Jim Burkhard, S&P Global Commodity Insights head of crude oil, energy and mobility research. "The war is not about oil, but oil flows could be impacted in a major way. But it is too early to tell for sure."

The OPEC+ alliance has enacted a series of production cuts, the most recent of which went into effect Jan. 1, aimed at bolstering flagging market sentiment weighed down by the uncertain outlook for the global economy amid still high inflation in key markets and conflicting industrial data from China.

The cuts have many forecasters estimating that the oil market will be in supply deficit for much, if not all, of 2024, and crude prices have risen accordingly.

Platts, part of S&P Global Commodity Insights, assessed Dated Brent at $93.35/b on April 12, up more than 20% since the start of the year. The rise has prompted some nervousness in the US, with the Biden administration keen to prevent further upward momentum ahead of what is expected to be a bitterly contested presidential election in November.

Geopolitical tensions stemming from the Israel-Hamas and Russia-Ukraine conflicts have also bolstered prices.

Any Israeli retaliation on Tehran, particularly targeting Iranian oil facilities, would have major implications for energy markets and possibly quickly embroil other major producers, including Tehran's OPEC counterparts Saudi Arabia and the UAE, which have previously found their refineries, pipelines and ports targeted by Iranian-backed Houthi militia in Yemen.

Beyond an Israeli military strike, the White House could tighten its sanctions enforcement on Iran, clamping down on oil exports that have been allowed to rise over the last year, but that could come with added US pressure on Saudi Arabia, the world's largest crude exporter, and other OPEC producers to raise output to mitigate any losses in Iranian flows.

The International Energy Agency estimates the OPEC+ alliance has some 6 million b/d in spare production capacity that could be tapped, if deemed necessary. The US could also release more crude from its Strategic Petroleum Reserve.

Iranian crude production reached 3.12 million b/d in March, according to the latest Platts OPEC+ survey by S&P Global Commodity Insights, up more than 600,000 b/d year on year.

OPEC+ ministers are next scheduled to convene June 1 in Vienna. One delegate said no emergency meeting was planned as of now.

Calls to deescalate

In making its first direct attack on Israel from its soil, Iran launched dozens of drones and cruise missiles late April 13 in retaliation for a suspected Israeli air strike on Tehran's embassy in Damascus, Syria, April 1 that killed seven Iranian Revolutionary Guard Corps officers.

Iran's permanent mission to the UN said on X that the "matter can be deemed concluded." But it added that, "should the Israeli regime make another mistake, Iran's response will be considerably more severe" and further warned that the "US must stay away" from the conflict.

Following the attack, which came with several hours of warning in an apparently telegraphed move, US President Joe Biden said "nearly all of the incoming drones and missiles" had been intercepted, while Israeli officials said there was only slight damage caused.

Israeli officials have said they would calibrate any response in coordination with its allies, including the US, which has pledged to defend Israel but has said it will not participate in any direct offensive action against Iran.

"The situation is fluid, and if Israel signals they will not retaliate, the market might be much calmer," said Arne Anders Lohmann Rasmussen, chief analyst for Global Risk Management.

The Middle East accounts for some 40% of global oil exports. Iran has also threatened to shut down the Strait of Hormuz connecting the Persian Gulf to the Arabian Sea, through which some 20 million b/d of seaborne crude, condensate and refined fuels pass through, along with almost 11 Bcf/d of LNG.

Just prior to the drone and missile launches on April 13, Iran's military forces seized the MSC Aries, a Portuguese-flagged containership with Israeli-linked ownership about 50 nautical miles off the eastern UAE port of Fujairah near the Strait of Hormuz.

Saudi officials declined to comment, but in a statement carried by the official Saudi Press Agency, the ministry of foreign affairs said the kingdom "urges all parties to exercise maximum restraint and to protect the region and its people from the dangers of war," calling on the UN Security Council, which was scheduled to meet in an emergency session April 14, to prevent the crisis from escalating.

In product markets, many Middle Eastern airlines have canceled or rerouted flights, including Emirates Airlines, the region's biggest carrier, potentially affecting jet fuel demand. That likely will be reflected in product inventories at Fujairah, which S&P Global Commodity Insights exclusively publishes weekly.