As tensions between Israel and Iran grow, geopolitics is dominating the market narrative for oil. After the recent drone attacks, a military conflict between Iran and Israel could quickly embroil nearby major oil and gas producers, including Tehran's OPEC counterparts -- Saudi Arabia and the UAE, which have previously found their refineries, pipelines and ports targeted by Iranian-backed Houthi rebels in Yemen.
The Middle East accounts for nearly 40% of global oil exports. Iran has also threatened to shut down the Strait of Hormuz connecting the Persian Gulf to the Arabian Sea, through which around 20 million b/d of seaborne crude, condensate and refined fuels pass through, along with almost 11 Bcf/d of LNG. Any further escalation of conflict between Iran and Israel could sharply influence trade flows via the Strait of Hormuz, the world's most critical shipping lanes, with particularly significant repercussions for the global tanker freight and maritime insurance markets.
For the past few months, the additional war risk premium in the Red Sea has been 0.5%-1% of the value of the hull and machinery of the ship varying with age and size, compared with 0.0001% in the Persian Gulf, sources said, adding that it is the latter's turn now to rise significantly.
Spotlight on Iran
The sharp escalation of tensions between Israel and Iran has prompted the market to question whether the flow of Iranian crude oil to China's independent refiners can continue uninterrupted. For now, the consensus view is that the volumes will likely remain intact in the foreseeable future.
While refiners across Asia have started to think of alternatives in the event of an escalation, China's Shandong-based independent refiners are not looking to step away from purchasing Iranian crude -- one of their most favored feedstock. To give a sense of the volumes that normally flow to China from Iran, independent refineries were estimated to have imported around 4.81 million mt, or 1.14 million b/d, of Iranian feedstock in March,
comprising crude oil and fuel oil. But these import volumes were lower than the levels seen in October 2023 when Iranian suppliers started to raise prices while tightening oil exports.
Iranian cargoes, which are usually masked as blended crudes that originate from Malaysia, have been the main feedstock for independent refineries. These cargoes typically account for around 40%-50% of feedstocks imported by independent refiners in China, according to estimates. In the event of Washington imposing stricter sanctions, independent refiners in China might have a tough time buying those cargoes, potentially leaving room for replacement supplies.
Not enough headwinds
Global oil inventories are forecast to rise through May, but this may not be enough to tame oil prices amid the ongoing geopolitical developments and OPEC+'s supportive market management strategy. As a result, S&P Global raised its 2024 price forecast for Platts Dated Brent by a dollar to $85/b and for 2025 by three dollars to $79/b. As long as OPEC+ keeps a tight lid on supply, there will be fundamental support for Dated Brent prices above $80/b or higher for the remaining period of 2024. One bearish factor will be China's oil demand outlook, but the extent of its impact on prices remains to be seen.
After accounting for nearly half of the growth -- 47% to be precise -- in world oil demand from 2000 to 2023, China is transitioning to slower growth. That will not suddenly evaporate, but China's oil demand gains will likely slow from 1 million b/d in 2023 to 387,000 b/d in 2025. However, this does not, on its own, mean lower prices. The global macroeconomic outlook also tells a somewhat positive story.
We have again raised global macroeconomic growth forecast for 2024 to 2.6% from 2.5%, primarily due to the robust US economy and somewhat improved forecast for the UK and India. The growth projection for the US has been revised upwards to 2.5% for 2024 from 2.4% earlier. Despite the lingering global macroeconomic uncertainties, there are signs of improvement following supportive policy measures in several countries, notably China -- the key consumer of oil and other commodities.
The supply equation
The market will also be keeping a close eye on strong oil production growth outside of OPEC+. In 2024, non-OPEC+ liquids production is forecast to rise 1.9 million b/d. New West African exporters -- including Niger and Senegal -- will contribute to the growth, as will Iran, which does not participate in OPEC+ production cuts. The gains in liquids supply outside of OPEC+ is expected to exceed world oil demand growth of 1.7 million b/d in 2024, according to data. In contrast to rising supply outside of OPEC+, crude oil production within OPEC+ is expected to be lower in 2024 than in 2023 — and may be reduced again in 2025. For the markets, Ukrainian drone attacks on Russian refineries will also be closely watched as it provides an upside risk to both crude and product prices. Refinery outages remain high with 1 million b/d of Russian refinery capacity now offline due to Ukrainian drone attacks.
The extent of the damage and timeline for repairs remain unclear. However, what seems certain is that the attacks will continue and that further supply disruptions cannot be ruled out. As Russian crude runs fall, there will be a slowdown in diesel exports out of the largest non-OPEC supplier.
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