As Middle East tensions escalate, the global oil market is bracing for a potential nightmare scenario: a disruption to the flow of crude from Iran. The Kharg Island export terminal, responsible for loading the majority of Iran’s crude exports, has emerged as a key target for the Israel Defense Forces. If attacked, the terminal’s destruction could cripple Iran’s crude exports, causing oil prices to spike by over 10% and continue rising.
Located in the northeastern part of the Persian Gulf, Kharg Island is often referred to as Iran’s “oil island.” The island’s terminals handle around 90% of Iran’s global exports, making it a critical component of the country’s oil infrastructure. An attack on the island would have a devastating impact on Iran’s economy, which relies heavily on oil exports for access to US dollars and the global market.
Iran’s oil output averages around 2.82 million barrels per day, with the country aiming to boost its oil output capacity to 3.9 million bpd by 2025. The country’s oil fields hold an estimated 12% of the world’s total oil reserves, making it a significant player in the global energy market.
While Israel’s threat of an attack on Iran’s oil infrastructure is seen as more of a warning than an imminent action, the oil market is already pricing in a scenario where 1.5 million barrels per day of supply are taken offline. OPEC members could potentially produce an additional 500,000 bpd, while US production could rise by 250,000 bpd, making the situation manageable.
However, if Israel were to target Iran’s oil and gas infrastructure, the Abadan refinery near the border with Iraq could be a possible target. The facility accounts for 17% of Iran’s refining capacity and 13% of its gasoline supply, making it a critical component of Iran’s energy sector.
As tensions between Iran and Israel continue to escalate, oil prices have rallied, with global benchmark Brent crude gaining over 8% for the week. The S&P 500 Energy sector is poised for a weekly rise of over 5%, while benchmark US stock indexes are on track to end lower on the week.
In the event of an attack on Iranian oil-export facilities or refineries, oil prices could surge by $10 to $15 a barrel, according to analysts. The flow of oil through the Strait of Hormuz, a narrow waterway that borders Iran, is also a significant concern, with a disruption to oil transportation through the strait potentially causing oil prices to temporarily spike over $100 a barrel.
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