“Emergency brakes” needed to escalate relations between Iran and Israel to avoid an oil collapse
“All-out war” appears poised to break out in the Middle East, the region of the world with the greatest concentration of oil production. Moreover, the main artery of the world trade in crude oil passes through this region. However, despite the intense ups and downs, the price of oil is still far from $100, and panic does not seem to be spreading in the stock markets, except for the initial “panic” caused by Iran’s missile attacks on Israel. Although the threat exists, the Strait of Hormuz, the world’s oil artery, can continue to function normally thanks to what can be called certain “emergency brakes”.
The Strait of Hormuz, located between Oman and Iran, connects the Persian Gulf with the Gulf of Oman and the Arabian Sea. This is undoubtedly the most important oil artery in the world, as large volumes of oil pass through the strait. In 2022, the country’s oil flow averaged 21 million barrels per day (b/d), or equivalent approximately 21% of global petroleum liquids consumption. In the first half of 2023, total oil flows through the Strait of Hormuz remained relatively stable compared with 2022, as higher refined product flows partially offset lower crude oil and condensate supplies.
During the period from 2020 to 2023, production volumes of crude oil, condensate and petroleum products transit through the Strait of Hormuz increased by 2.4 million barrels per daythanks to oil demand recovering from the economic crisis caused by the Covid pandemic. Flows through the Strait of Hormuz in 2022 and the first half of 2023 accounted for more than a quarter of the world’s total seaborne oil trade. In addition, about a fifth of global liquefied natural gas trade also passed through the Strait of Hormuz in 2022, according to a US Department of Energy report.
In fact, the importance of this strait in global trade is such that Bank of America warned in 2023 that the price of crude oil could skyrocket “if supplies through Hormuz, the point where nearly 20% of the world’s oil passes through LNG, are disrupted.” . closed for a significant period, Bank experts explain, crude oil could rise above $250 per barrel, and natural gas – $50. Why is the market not clearly pricing this scenario at the moment?
Iran “one”
The fact that oil prices have not picked up since yesterday’s recovery from the bombings further strengthens analysts’ view that investors still believe crude oil will remain on the margins of this escalation. “The crude oil market has so far been extremely short-term and complacent to geopolitical risks,” analyzes Bob McNally, president of Rapidan Energy Group and an adviser in the George W. Bush administration. “The risk premium for crude oil will only increase if the market sees an escalation that directly affects infrastructure or energy flows, or if Israel attacks critical infrastructure that threatens the regime,” he points out.
Unlike in the past, today many countries surrounding Israel are allies (even if they are already “hidden” with their small mouths). Saudi Arabia, United Arab Emirates, Egypt, Oman, Jordan, Morocco and even Qatar. They demonstrate friendly relations with Israel. Probably never in history has Israel had such warm relations with countries that until recently were direct enemies. Although the Strait of Hormuz is largely controlled by Iran, the rest of the Arab countries need it to export crude oil, which is more than an important emergency brake.
Frederic Kempe, president and chief executive of the Atlantic Council, underscores this “loneliness” of Tehran, noting that countries that signed the Abraham Accords with Israel have not given up hope of returning to the path of normalization. In 2020, the United Arab Emirates, Bahrain, Sudan and Morocco signed these peace agreements with Israel. “No one has broken off relations with Israel or withdrawn from the agreements. And although many, including the United Arab Emirates, “In trying to reduce tensions with Iran, they are doing so with their eyes wide open to the ongoing threat that Iran poses, and with a strong belief that, in the long term, Israel will be more integrated into the Middle East, not less, because Iran is willing,” Kempe concludes his speech.
The shadow of the USA and the internal situation
While Israel has promised retaliation against Iran, and newspaper archives confirm there will be retaliation, the key is how far Tehran is willing to go. And in this sense, its internal situation and the long shadow of the United States are another “emergency brake.” “Israel has put Iran in a hopeless situation. If he fails to escalate his offensive and attack Israel, he will lose the trust of his allies, who believe he has not done enough to help them. However, escalation could lead to attacks from Iran. Israeli retaliation against Iran itself, including against its nuclear facilities,” Kempe decides. To an Atlanticist think tank strategist, Iran’s attack in the last few hours appears to be something of a compromise, an attack just enough to placate hardliners and buy time without going so far as to provoke a wider war with Israel or, worse, USA.
“Iran will likely intervene not because it wants Democrats to lose the US elections (quite the contrary), but because it cannot abandon Hezbollah or allow its partners’ leaders (or their own) will be killed with impunity. But Iran doesn’t want to be bombed. It is vulnerable due to hidden internal instability and social unrest,” geopolitical experts at BCA Research emphasize in their latest commentary.
The thesis of these experts is that Tehran has no interest in ousting Democrats from the White House because they would be less likely to sanction Iranian oil exports or use military force to prevent Iran from obtaining nuclear weapons. Therefore, they decide, before the elections, Iran would rather carry out symbolic attacks on oil supplies than cause a large-scale shock. In fact, according to the BCA, Tehran’s priority is to ensure that Donald Trump, who has already imposed tough sanctions, does not return to power. US and Israeli officials believe Iran sponsored assassination attempts on former President Trump and his return to the White House, raising the risk that Tehran will try to shake up the Hormuz oil market.
At UBS’s investment team, led by CIO Mark Haefele, the base case is still not all-out war between Israel and Iran: “There are some indications that Iran’s attack may have been intended to demonstrate its resolve without provoking a more forceful response.” Israeli strike. Iran’s missile attack on Israel in April was reported in advance, caused little damage, and led to a limited Israeli attack on an Iranian military base following Iran’s attack in April. “The US called on Israel to respond with restraint. “
Iran’s interests
These analysts are collecting other previous signs that Iran may be willing to de-escalate in exchange for some relief from economic sanctions. Iranian President Masoud Pezeshkian told the UN General Assembly that Iran is “ready to engage with the parties to the 2015 nuclear deal. Moreover, they point out, Iran faces its own internal problems, as evidenced by large-scale protests in 2022 following the death of Mahsa Amini, who died in police custody after being arrested for not covering her hair.
“Iran may not be interested in entering a full-scale war with Israel when members of the Axis of Resistance are weakened and the United States has increased its presence in the region.. However, a hard line may still prevail. The risk of miscalculation by Iran, its allies or Israel continues to increase,” UBS concluded.
If Iran ends up going on a final spiral, there are other emergency brakes. Even if Tehran tries to restrict shipping through the Strait of Hormuz, Qatar’s relatively warm relations with Iran mean that Qatari liquefied natural gas (LNG) supplies to the West could still get through, and oil supplies from Saudi Arabia and the United Arab Emirates could potentially be redirected via pipelines to the ports of the Red Sea.
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