Oil prices are sensitive to geopolitical tension. There’s renewed tension between the US and Iran due to the attack on the US Embassy in Baghdad. The tension could impact oil prices. According to a CNBC report, “Iraqi Shiite militia” supporters organized the attack in the response to the US airstrike. Last week, a rocket attack killed a US contractor in Kirkuk.
Trump blamed Iran
On Tuesday, President Trump tweeted, “Iran killed an American contractor, wounding many. We strongly responded, and always will. Now Iran is orchestrating an attack on the U.S. Embassy in Iraq. They will be held fully responsible.” The Trump administration could impose more stringent sanctions on Iran. Last year, the US and Iran were on the brink of war after Iran shot down a US surveillance drone.
In November of 2019, the US imposed sanctions on officials who are linked to Iran’s top leader, Ali Khamenei. The officials included Mohammad Mohammadi Golpayegani, Vahid Haghanian, and a few others. In September 2019, the US held Iran responsible for a drone attack on Saudi Arabia’s oil facilities.
What could be provoking Iran?
Khamenei wants the US sanctions on Iran’s energy exports to end. Analysts think that Iran could attack “Middle East oil targets” to pressure the US for negotiations, based on an S&P Global Platts report. Iran’s economy is on the verge of collapsing due to these sanctions.
According to the IMF, Iran’s GDP is estimated to have contracted by 9.5% in 2019. The slowdown in Iran’s GDP could continue this year. Iran’s crude oil exports have fallen below 1 MMbpd (million barrels per day) compared to more than 2 MMbpd before the sanctions.
At 7:58 AM ET today, US crude oil active futures are almost unchanged compared to the closing level on Tuesday. Rising tensions between the US and Iran don’t suggest the possibility of talks anytime soon. If the US sanctions on Iran continue this year, it could be a bullish driver for oil prices. The global oil market could remain oversupplied in the first two quarters.
Also, in the absence of talks, the Strait of Hormuz could be a potential point of conflict. Last year, oil tankers’ movement was sabotaged through the strait. Read Will Oil Prices Trend Lower in August? to learn more.
The total flow of crude oil and condensate and petroleum products through the strait was 20.7 MMbpd in 2018 based on EIA data. Most of Saudi Arabia’s seaborne oil exports pass through the Strait of Hormuz. In 2018, around 1.4 MMbpd of oil supplies to the US from the Persian Gulf passed through the strait.
Any conflict in the Strait of Hormuz could lead to a surge in oil prices. The Brent-WTI spread is also sensitive to the global oil supply. The Brent-WTI spread expanded after the OPEC+ production cut. Energy stocks, including ConocoPhillips (COP) and Hess (HES), could rise with any expansion in the Brent-WTI spread. Read Hess Corp: Performance, Holdings, and Analysts’ Views to learn more.