This week, geopolitical tensions in the Middle East have taken centre stage, with escalating conflict between Israel and Iran raising concerns about tensile disruptions to global energy markets. As you can see from the chart below, oil has already reacted. Let's take a look at the implications for oil prices and market stability.

 

 

Developments

Israel has intensified strikes on Iran's military, nuclear, and energy infrastructure, including the Shahran oil depot. Iran has launched over 200 missile strikes and threatened retaliation on US, UK, and French military bases if they intervene. The conflict remains localized at this moment; however, the risk of broader regional escalation remains.

 

Potential high-risk scenarios

• Disruption of Iran's Kharg Oil Terminal, which handles over 90% of its crude exports.
• A potential blockade of the Strait of Hormuz, a critical shipping route for 30% of the world’s traded oil.
• Proxy attacks on Gulf state energy infrastructure or U.S. military bases, which could escalate the conflict into a regional war.

Most likely outcomes, with respect to oil prices

Historically speaking, past conflicts involving Israel have typically caused short term price spikes without lasting supply disruptions. Major supply disruptions have historically occurred during conflicts involving large oil producers, such as the Gulf War or the Libyan Civil War, leading to sustained higher prices. One of the biggest factors that could affect oil prices would be the closure of the Strait of Hormuz. We believe the likelihood of Iran closing the Strait of Hormuz remains low. Such a move would be too economically detrimental to Iran, given its reliance on the free passage of goods and vessels through the strait. Additionally, it would antagonize key customers, particularly in Asia (e.g., China), and likely provoke significant global retaliation. As you can see from the chart below, almost 16 million barrels of crude travel through the strait every day. Closing this would most likely have the most significant price impact on oil.

 

 

While the current conflict has certainly heightened oil market concerns, historical patterns and Iran's economic reliance on the Strait of Hormuz should keep prices from escalating too far. For sustained higher oil prices, further destabilization of Iran or broader regional disruptions would need to occur. I should also point out that, at $74 per barrel, the current price premium reflects only a 17% probability of a worst-case scenario (a price over $100 USD per barrel) according to J.P. Morgan. We should find out more over the next couple weeks...

 

I have also attached some commentary from our CIBC Economics team entitled “China is not blinking”.

 

As always, if you have any questions, please feel free to give us a call.

 

Have a great weekend.

 

Milan