The intensifying conflict between Israel and Iran over the weekend suggests that risks to the oil market have escalated and the geopolitical risk premium is expected to be priced into oil markets, ANZ said in a Monday report.
Israeli missiles struck a natural gas processing facility linked to Iran's South Pars field. Iran's natural gas production is essentially for domestic consumption. However, this raises the prospect that Israel may target Iran's oil infrastructure.
Iran's oil output has risen to 3.3 million barrels per day, a six-and-a-half-year high. Ship tracking data show Iran's exports of crude oil have been 1.5 million barrels per day to 1.8 million barrels per day over the past 18 months.
Damage to Iran's oil and gas network could worsen electricity shortages and potentially force it to use more domestically produced crude oil as fuel. This would likely impact crude oil exports. Any attacks that target oil export facilities would worsen the blow.
If supply is disrupted, the oil market is much better equipped to respond to that than it has been in the past, with OPEC having over 6 million barrels per day of spare capacity that can be quickly activated. Generally, geopolitical events directly involving producers have had the biggest impact on the market, but prices have tended to quickly retreat as the risk dissipates.
Crude oil prices are unlikely to return to $60 per barrel for the foreseeable future.
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