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FACTBOX: Oil markets braced as Biden warns Iran over escalation threat

Highlights

Israeli EMG pipeline flows remain suspended

US and Iran trade warnings over possible regional escalation

US increases naval presence in Eastern Med region

  • Author
  • Andrew Critchlow    Stuart Elliott    Max Lin    Kelly Norways    Nick Coleman
  • Editor
  • James Leech
  • Commodity
  • LNG Natural Gas Oil Shipping

US President Joe Biden over the weekend warned Iran from escalating the conflict between Israel and Hamas into a regional war as he beefed up the US military presence in the region, in a move that sets energy markets on alert.

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In an interview with CBS, Biden said "don't, don't, don't" when asked about the potential for the regime in Tehran to widen the turmoil. In an interview Oct. 15 with Al Jazeera, Iranian Foreign Minister Hossein Amir-Abdollahian warned that unless Israel stopped retaliation in Gaza "it is highly probable that many other fronts will be opened."

Trade flows

-- Disruption to energy markets has mainly been limited to the Eastern Mediterranean since Hamas militants launched attacks from Gaza into Israel on Oct. 7. Gas flows have been most impacted.

  • Flows of Israeli gas via the offshore EMG pipeline to Egypt have been suspended, with exports being rerouted via the FAJR pipeline in Jordan following the order to shut in production from the Tamar platform. The pipeline -- running from Ashkelon in southern Israel to El-Arish in Egypt, is the offshore route for Israeli gas to reach the Egyptian market and runs parallel to the Gaza Strip. Most Israeli gas exports to Egypt usually flow through the EMG pipeline.
  • Israeli gas production totaled 21.9 Bcm last year, a new record high for the country, according to ministry data. Production was made up of output from Leviathan (11.4 Bcm), Tamar (10.2 Bcm) and Karish (0.3 Bcm).
  • Along with an increase in domestic Israeli consumption to 12.7 Bcm, exports to Egypt and Jordan in 2022 also rose by 29% to 9.2 Bcm.

-- A widening of the conflict area beyond Gaza would in theory present a more serious risk to oil flows, especially from the Persian Gulf where Iran holds a strategic presence overlooking the Strait of Hormuz.

  • Jim Burkhard, vice president and head of research for Oil Markets, Energy and Mobility, S&P Global Commodity Insights, has warned that 500,000 b/d of Iranian exports could be at risk if the US tightens sanctions.
  • "Biden will be under pressure to enforce sanctions and curtail Iranian export revenue," said Burkhard in a note on Oct. 11.
  • OPEC officials from the Middle East have avoided addressing concerns over the wider risk to regional oil supplies from the turmoil in Israel and Gaza. The OPEC+ alliance including Russia pumped 40.85 million b/d on average in September, according to the latest Platts survey by S&P Global Commodity Insights published on Oct. 10.
  • Azerbaijan, Kazakhstan and traditionally northern Iraq are the main crude sources for Israeli refineries, although crude exports from northern Iraq via a pipeline to the Turkish coast have been suspended for much of 2023.

Prices

-- Fear of the conflict spreading wider in the Middle East has added to the bullish mood in oil markets, fueled by a mixture of OPEC+ voluntary supply cuts and heightened geopolitical risks from the ongoing conflict in Ukraine and sanctions against Russia.

  • Platts Dated Brent was last assessed on Oct. 15 at $92.735/b. The measure -- used as a benchmark for two-thirds of the world's crude futures contracts -- is up almost $14.50/b since the beginning of 2023.
  • Nevertheless, futures prices eased slightly on Oct. 16. At 1132 GMT, the ICE December Brent futures contract was down 15 cents/b from the previous close at $90.89/b, while the November NYMEX light sweet crude contract was up 2 cents/b at $88/b.

-- Geopolitical concerns have also filtered through to gas markets.

  • Platts, part of S&P Global Commodity Insights, assessed the December JKM spot LNG price at $18.345/MMBtu on Oct. 16, an increase of more than 40% since Oct. 6, the day before the Hamas attacks.

Infrastructure

-- No major oil or gas infrastructure runs close to the Gaza Strip or southern Israel, but Israel has shut in gas production from its Tamar field as a precaution.

  • Chevron said Oct. 9 that it had been instructed by the Israeli energy ministry to shut in gas production at the Tamar platform as a result of the unprecedented attack by Hamas.
  • Israel has become a major gas-producing country in recent years thanks to the Tamar, Leviathan and Karish fields. In May this year, the Israeli government approved a plan for the construction of a new onshore gas pipeline to Egypt that would enable the export of an additional 6 Bcm/year of Israeli gas. The 65-km pipeline, which would run from Ramat Hovav to Nitzana on the border with Egypt, is estimated to cost around Shekel 900 million ($250 million).
  • Tamar, which has been shut in before because of conflict in the region, produced 10.2 Bcm of natural gas in 2022.

-- Downstream, Israeli refinery operations could be impacted by an escalating conflict which could see facilities also targeted by Hezbollah millitants striking from within Lebanon. Shipping operations may also be disrupted within the conflict zone.

  • Israel has two refineries, with the biggest, the 197,000 Haifa plant, owned by the country's Bazan Group. The Paz Group-owned 110,000 b/d Ashdod refinery was the biggest buyer of Iraq's Ceyhan oil exports before they were halted in March.
  • The Mediterranean port city of Ashkelon has a capacity to carry 30 million mt of crude/year.
  • Eilat Oil Port accommodates tankers up to 350,000 dwt, with a storage capacity of up to 1.4 million cu m. Ashkelon Oil Port can receive tankers up to 250,000 dwt and has a storage capacity of up to 2.3 million cu m.
  • Haifa, Ashkelon, Ashdod and Eilat are connected by a pipeline network operated by Europe Asia Pipeline Co.
  • Port operations of Ashkelon and Ashdod have been impacted by the war, while operations at Haifa and Eilat have been operational.