During the acute phase of the conflict that began on June 13, Israel targeted not only military sites but also oil and gas infrastructure. On June 14, the South Pars gas field, which supplies Iran with two-thirds of its fuel, as well as a gas processing plant and a major oil depot near Tehran capable of holding nearly 260 million liters of gasoline, diesel, and aviation fuel, were struck. Additionally, a refinery south of the capital with a processing capacity of nearly 225,000 barrels per day was attacked. In response, Iran hit a refinery in Haifa with a capacity of 197,000 barrels per day, which was subsequently shut down.
However, these events have strangely had a muted impact on the market. On Friday, June 13, Brent crude oil futures surged by 13%, reaching $78 per barrel from $69 the previous day, but soon began to decline, dropping by 6% to $73 by Monday, June 16. A renewed increase occurred on the evening of June 17 amidst news of a National Security Council meeting in Washington and threats from President Trump against Iran. According to Trading Economics, on June 13, Russian Urals crude peaked at $68.54 per barrel, a 6% increase over the day, but by June 17 the price had fallen by 2% to $66.98 per barrel. On the morning of June 18, oil prices hovered around $75-76 per barrel for Brent and $71 for Urals, still below levels seen at the start of the year.
Current oil prices suggest that the market is still largely disregarding extreme scenarios, notes Reuters columnist Ron Bousso. It appears that markets and investors are in a wait-and-see mode regarding the conflict's progression, considering various scenarios ranging from a ceasefire and movement towards a nuclear deal between the U.S. and Iran to a coordinated effort by the U.S. and Israel to destroy Iran's nuclear infrastructure and regime change. Another escalation could occur if Iran were to target the energy infrastructure of U.S. allies, such as Saudi Arabia or the United Arab Emirates, adds Bousso. The primary risk for oil markets remains the potential blockage or disruption of tanker traffic through the Strait of Hormuz, which accounts for one-fifth of global oil and gas supplies, he further emphasizes.
Why Prices are Declining
The escalation in the Middle East has occurred, but it had been anticipated by traders, said Alexey Gromov, the Chief Energy Director at the Institute of Energy and Finance. He explained that the initial spike in the price of crude on June 13 was quite significant, considering the limited scope of the military conflict, an increase in supply, and OPEC+'s downward price maneuvering. Traders initially feared uncontrolled escalation of the conflict to the point of threats to navigation in the Strait of Hormuz; however, this did not materialize, and no supply disruptions from the Persian Gulf have been noted. As a result, markets calmed down, and the price rise stalled, Gromov stated. "As long as the war remains limited to aerial attacks we've observed for the last two years," the expert reflects. "Following the unprecedented terrorist attack in October 2023, Israel and Iran have already exchanged missile strikes. We're witnessing something similar now. There is an air war ongoing, but prospects for further escalation remain unclear."
Prices are declining based on expectations that the conflict may be less extensive than initially thought, agrees Stanislav Mitrakhovich, an expert from the Financial University and the National Energy Security Fund. "One could imagine a more severe scenario in which both sides would more actively bombard each other's oil and gas infrastructure. However, that is not happening right now, and this is why prices have retreated," he explains. According to Mitrakhovich, the opposing sides will eventually have to reach an agreement. Iran is primarily motivated to do so, as Israel has weakened its allies, such as the Hezbollah group in Lebanon. Tehran has also lost the backing of Syria, which previously housed systems that warned Iran about air attacks, the analyst lists.
The latest round of the Iran-Israel conflict has so far had a limited effect on oil prices, largely due to the fact that, due to sanctions, Iran's role in the oil market has diminished in recent years, adds Sergey Tereshkin, CEO of the Open Oil Market. Due to U.S. embargoes, over 90% of Iran's oil exports now go to China, where the country's key buyers of Iranian oil are refineries that will bear the brunt of the current crisis, Tereshkin explains. India, Japan, and EU countries halted purchases of Iranian oil after 2019, when the U.S. embargo on its import came into effect, he reminds. "The impact of the conflict on prices is likely to be short-term," concludes Tereshkin.
Will Iran Block the Strait of Hormuz?
In light of the Israeli-Iranian skirmishes, statements have emerged suggesting that escalating conflict could lead to Iran blocking the Strait of Hormuz, potentially causing prices to surge to $300 per barrel. The Strait of Hormuz, located between Iran, the UAE, and Oman, is 161 km long and 34 km wide at its narrowest point, connecting the oil-rich Persian Gulf with the Indian Ocean. Its shipping lanes are just 3 km wide in each direction, rendering passing vessels susceptible to mines, missile strikes, artillery fire, and interception via boats and helicopters, notes Bloomberg.
The strait is crucial for global oil and liquefied natural gas (LNG) trade. According to Bloomberg, in 2024, approximately 16.5 million barrels of oil per day, or 26% of global supplies, were transported through the strait from Saudi Arabia, Iraq, Kuwait, the UAE, and Iran. Furthermore, nearly one-fifth of the world's LNG supplies, primarily from Qatar, passes through this strait. In the past, Iran has seized merchant vessels traversing the strait and has repeatedly threatened to block it.
"Gromov from the IEF believes forecasts of soaring oil prices to extreme heights and the closing of the Strait of Hormuz are unlikely to materialize. The key reason is that the conflict participants themselves fear such developments. An uncontrolled situation that could arise in the region as a result of such actions could devastate Iran's economy, jeopardizing its statehood as cultivated since the overthrow of the Shah's regime in the late 1970s. In my opinion, the authorities in Iran understand this and aim to prevent an unpredictable escalation that Iran may simply not endure."
Alpha Bank does not foresee a scenario of a complete blockade of the Strait of Hormuz, which would entail a 20% reduction in export flows that could trigger global upheavals in the raw materials market and shift dynamics in the global economy, says Nikita Blokhin, a senior analyst at Alpha Bank. "Should such risks emerge, the conflict will likely be resolved diplomatically as regional players get involved in the process," he states. "Key Persian Gulf countries exporting oil and LNG, such as Qatar, the UAE, and Saudi Arabia, are interested in maintaining their exports and are likely to employ all available leverage to resolve the situation. In the case of a partial blockade of the Strait by Iran, a scenario where vessels are guided under the protection of other regional players is entirely plausible."
The prospect of blocking the Strait of Hormuz—impacting oil transport from Saudi Arabia and LNG from Qatar—is unlikely since this would leave Iran isolated from key Middle Eastern nations, says Tereshkin from the Open Oil Market. "I find it improbable that Iran would block the Strait of Hormuz, at least for an extended period," agrees Mitrakhovich from the Financial University. "Otherwise, oil and gas exporters from other parts of the world, including Russia and the U.S., will reap all the rewards from these markets."
What the Conflict Means for Russia
In the spring, Russian oil prices soared: According to the Ministry of Economic Development, which publishes average monthly prices for Urals, in March, the price dropped below the "oil ceiling" level to $58.99 per barrel, down from $61.99 in February. Subsequently, the decline continued: in April, prices fell to $54.76 per barrel and to $52.08 in May. Over three months, the price for a barrel of Russian oil decreased by 16%. However, the situation has shifted: according to Trading Economics, over the past month the price of Urals crude increased by 14.36%, although it still remains 11.3% lower than a year ago.
From a "cynical economic pragmatism" viewpoint, the conflict between Israel and Iran benefits Russia, believes Gromov from the IEF. "Before the escalation, global oil prices were holding steady at around $64-65 per barrel, and there were expectations they would fall," he recalls. "The G7 and the EU were discussing lowering the price cap for Russia from the current $60 to $45 per barrel. Had this occurred, it would have posed a serious challenge to the Russian oil industry and our economy, leading to reduced budget revenues." The escalation in the conflict between Israel and Iran has led to two outcomes favorable for Russia, according to Gromov. Firstly, global oil prices jumped by $10, lifting Russian oil prices with a corresponding correction in budget revenues. Secondly, as long as the situation between Israel and Iran remains unsettled, it is unlikely that G7 countries will take any action regarding price caps for Russia, he explains.
At the same time, in the medium term, Russia is interested in maintaining Iran's potential as a regional player in the Middle East and ensuring it remains a significant counterbalance to the policies pursued by Western countries and Israel in the region, argues Gromov: "Thus, while benefiting short-term from this conflict, Russia will not seek to see it escalate further; rather, it is interested in restoring the status quo that existed before the Israeli attacks on Iran in early June." However, it seems that Iran is starting to weaken under Israeli airstrikes, which could lead to its forced political defeat under pressure from U.S. threats to directly intervene in the current conflict, the expert speculates.
Blokhin from Alpha Bank notes that even before the onset of the current conflict, China—a key trading partner of Iran—significantly reduced its imports of Iranian oil amid rising geopolitical risks. Iran exports about 1.7 million barrels of crude oil per day, constituting less than 2% of global consumption. According to the analytics firm Kpler, over 90% of Iran’s oil exports go to China, with most being purchased by small private refineries ("teapots") located in Shandong province. Interestingly, these refineries account for over 20% of China’s refining capacity.
In recent months, Blokhin points out, independent Chinese refineries have been cutting back on Iranian oil purchases: their total imports in May fell to 1.25 million barrels per day, 27% less than 1.72 million barrels per day in April, and 35% lower than in March, when purchases were 1.91 million barrels per day. He states that more than a third of the refineries actively purchasing Iranian oil are currently reassessing their plans and evaluating the risks of continuing their collaboration with Iran. "It is quite probable that these consumers will seek alternative and more reliable sources of supply, among which Russia is likely to emerge, offering more favorable terms and significant discounts," says Blokhin.
Should escalation occur, it will be Iranian and Arab oil and gas producers who suffer, while other players in the oil and gas market—Russia, U.S. shale producers, and renewable energy equipment manufacturers—may gain, at least in the short term, concludes Mitrakhovich from the Financial University.
Source: Forbes
