Iran has one move that could shake the oil market

The UK Maritime Trade Operations Center (UKMTO) published a guidance document for seafarers, in which it emphasized that instructions not to cross the straits are not legally binding. That is, it actually recommends that ships violate these calls and cross anyway. It is possible that Iran is trying to sow fear to stop the actual crossing of the straits, without necessarily having the ability to enforce it.

In instructions to seafarers, the UKMTO says that ships “are advised to proceed with caution and carry out increased risk assessments”, to listen to the relevant communication channels, to be careful of disabling electronic warfare navigational devices and errors in identification (for example, of American forces specifically), to stay as far away as possible from military forces and to report suspicious activity. But in the bottom line, the recommendation is to go through the straits despite the calls and not to obey them. So it seems that at least for the moment, Iran chooses not to put its full weight on blocking the straits, or alternatively is not able to do so at all.

Oil prices rise due to the “war premium” after the attacks in Iran to $73 per barrel Brent. Now, the question arises whether the prices will remain at this level due to the risks, or whether some of them will materialize.

How significant is Iran to the global oil industry?

The answer to that is much less than in the past, but still influential. Today, Iran is responsible for about 3% of the world’s supply and produces a little more than 3 million barrels a day.

The rise of the Ayatollah regime in 1979 and the sanctions imposed on the regime over the years led to a gradual contraction of its power, after in the 1970s it was responsible for over 10% of the global crude oil industry.

As of today, Iran is now ranked fourth among the countries of the Organization of Petroleum Exporting Countries (OPEC) after Saudi Arabia, Iraq and the United Arab Emirates. Despite its decline in power, Iran still brings in billions of dollars every month from the oil industry. According to estimates, it is 2-3 billion dollars every month.

Iran’s main customer is China, which buys oil barrels under the radar at a significant discount.

The possible effects on oil prices

As far as Israel is concerned, the main effect of the increase in oil prices is the gas contracts, which are mostly linked to the price of the Brent barrel, which is now becoming more expensive. This, in turn, will have an impact on the prices of electricity which is now mostly produced by gas.

The main concern in the global oil industry comes from another place – damage to the shipping lanes in the Straits of Hormuz, which connect the Persian Gulf to the Arabian Sea. Oil and gas shipments from Iraq, Kuwait, Saudi Arabia and the United Arab Emirates depart from there. It is not clear if Iran will do so and if it can do so. In that case, the main damage will be on the Asian continent where other important industrial countries such as Japan, Korea and Taiwan rely on oil imports from the Middle East.