Iran could return to 2019 playbook and hit crude oil targets in Middle East, says RBC's Helima Croft

Oil Market Volatility Amidst Iran-Israel Conflict: Helima Croft's Analysis

Key Concepts:

• US potential airstrikes on Iran's Fordo enrichment facility
• Iran's potential response: short-range missile deployment, attacks on ships/oil facilities
• Impact of oil price spikes on US consumers and inflation
• Iran's calculus: regime survival vs. pleasing China
• Potential for prolonged oil disruptions due to attacks on facilities in Saudi Arabia or Iraq
• Straits of Hormuz vulnerability: mining, tanker attacks, ship transponder jamming

US Intervention in Iran: A 50/50 Call

• Helima Croft, RBC's global head of commodity strategy, assesses a "50/50 call" on whether President Trump will authorize US airstrikes on Iran's Fordo enrichment facility.
• The Fordo facility is crucial because it houses high-speed centrifuges used for highly enriched uranium production, nearing weapons-grade levels.
• Israel is believed to lack the capability to disable the Fordo facility independently, necessitating US involvement.

Iran's Potential Retaliation: A Playbook from 2019

• US intervention raises the risk of Iran perceiving an "existential survival crisis," potentially triggering retaliatory actions.
• Iran possesses significant stockpiles of short-range missiles capable of targeting regional facilities in the Gulf.
• Croft highlights the "recency bias" in the market, urging a review of Iran's 2019 actions after the reimposition of "maximum pressure" sanctions.
• In 2019, Iran targeted tankers off the UAE coast, hit critical pipelines, and attacked Saudi Arabia's Abqaiq facility (the world's largest oil processing facility), temporarily removing half of Saudi Arabia's production.
• Security experts suggest Iran's 2019 actions were "warning shots," implying a greater capacity for disruption if desired.

Macroeconomic Impact of Oil Price Spikes

• Oil price spikes, potentially exceeding $80-$85 per barrel, would negatively impact US consumers and counteract President Trump's efforts to reduce inflation.
• While some believe Iran would avoid disrupting oil supplies to China (its main customer), Croft argues that regime survival would take precedence in an existential crisis.
• Iran has faced "withering airstrikes," including the killing of IRGC leaders and generals, increasing the likelihood of a forceful response.
• The view in Washington is that Iran retains the capability to strike oil facilities if it chooses to do so.

Scenarios for Prolonged Oil Disruptions

• Unlike short-lived oil spikes, major Middle East conflicts (e.g., Gulf War, Arab Spring) have historically caused "multi-month, sometimes year-long disruptions" of over a million barrels per day.
• A "significant attack on a facility" could trigger a sustained disruption.
• Beyond Saudi Arabia, Iraqi energy facilities are vulnerable due to the presence of Iranian-backed militias operating near critical infrastructure. Iraq is the second largest OPEC producer, responsible for around 4 million barrels a day of production.
• While the US Fifth Fleet in Bahrain could potentially reopen the Straits of Hormuz, Iran could still mine the straits or target oil tankers, causing significant problems.
• Reports indicate Iran is "jamming ship transponders very, very aggressively" in the Straits of Hormuz.
• Qatar Energy and the Greek shipping authority have issued warnings to their vessels about traversing the Straits of Hormuz.

Conclusion

The oil market faces significant volatility due to the escalating Iran-Israel conflict. The potential for US intervention in Iran raises the risk of retaliatory attacks on regional oil infrastructure, leading to prolonged disruptions and price spikes. While the Straits of Hormuz remain a key chokepoint, the vulnerability of facilities in Saudi Arabia and Iraq, coupled with Iran's demonstrated capacity for disruption, necessitates a cautious approach to assessing the risks to global oil supplies.