Iran oil exports slump to multiyear lows as Tehran braces for retaliation

Iran's crude export loadings have fallen sharply, according to observed and estimated tanker loadings, as Tehran braces for a potential strike on the country's key oil infrastructure as part of an Israeli retaliation that could impact Middle Eastern oil supplies.

Iran's last crude export cargo was estimated to have loaded on Oct. 4 with only one other cargo seen since Sept. 29, when the geopolitical conflict between Iran and Israel escalated, according to S&P Global Commodities at Sea. Although many Iranian crude exports are shipped in ‘dark’ tankers not transmitting GPS location signals, CAS estimates that Iran's crude exports slumped to 237,000 b/d in the week to Oct. 6, the lowest weekly total in at least two years.

Iran normally ships 7-10 crude cargoes each week with export flows averaging 1.7 million b/d so far this year, up from 1.1 million b/d in 2022, according to the data.

Brent oil futures lost ground on Oct. 8 after surpassing $80/b for the first time since August on Oct. 7 amid fears of a full-blown war between Israel and Iran. At 1620 GMT, front-month Brent was at $77.25/b down 4.55% on the day following reports that Israel will avoid Iran's nuclear facilities in its military response to Iran's Oct. 1 missile attack.

The export slowdown from Iran comes after satellite images circulated on social media Oct. 3 appearing to show tankers leaving Kharg Island, Iran's top crude terminal which handles about 90% of its exports. Traders speculated that Iran was keen to move unladen tankers away from their anchorages at Kharg Island to avoid damage from a potential Israeli strike. Exports from Kharg Island may have now resumed, however, with a 657,000-barrel cargo of Iranian crude lifted there on Oct 4, the CAS data shows.

Fears of a major escalation in the conflict hitting regional oil supplies were sparked by US President Joe Biden on Oct. 3 when he said the US was discussing potential attacks on Iranian oil facilities with Israel. Iran's military head responded saying Tehran would hit back harder at Israel with a "stronger response," if attacked.

Iran's oil ministry declined to comment on any disruption to recent oil exports

Hormuz threat

With Iran threatening to expand its response to the "regional level" if Israel's allies support a retaliatory attack, some market watchers have speculated that oil prices could surge over $100/b if Iran attempts to shut down the Strait of Hormuz.

In the past, Iran has threatened to disrupt global oil trade by attacking shipping and laying mines in the global trade chokepoint through which almost 18 million b/d of crude and products transited during the first half of 2024.

But most market watchers believe that a major supply disruption, including the full or partial closure of the Strait of Hormuz, remains unlikely and would be mitigated quickly by global oil stocks and output from other OPEC producers.

"The odds of closing Hormuz are very, very small. However, if there were any attacks on tankers, the markets would spike, but the US /other military would intervene to keep oil flowing. The US' Strategic Petroleum could be released again if there were a perceived shortage too," said Rick Joswick, head of S&P Global Commodity Insights near-term oil research.

If Iran is successful in temporarily deterring shipping via Hormuz the initial price impact could be significant, however.

The unlikely closure of the Strait of Hormuz could theoretically double the war risk premium in crude futures compared with the one seen during the start of the Russia/Ukraine war, when oil prices rose by up to $40/b and the market panicked over some 7 million b/d of Russian oil supply being disrupted, according to S&P Global oil analysts.

Capacity buffer

If Israel attacks Iranian oil infrastructure -- even when assuming the Biden Administration agrees -- it would be a "high-risk move" for the US, said Jim Burkhard, vice president and head of research for oil markets, energy and mobility for S&P Global Commodity Insights.

Analysts also believe that OPEC, mostly its Middle Eastern producers Saudi Arabia and the UAE, have enough spare crude production capacity to offset any potential losses of supply from fellow member Iran.

Following a series of output cuts since 2020, OPEC+ is sitting on some 6 million b/d of spare production capacity, according to Commodity Insights estimates.

"Combined production from Saudi Arabia and the UAE tends to rise quickly and significantly following supply disruptions, typically offsetting 70%-90% of lost production within two quarters," oil analysts at Goldman Sachs said in an Oct. 4 note. "This analysis reinforces our long-held view that physical (e.g. closure of the strait of Hormuz) or political barriers to deploying spare capacity are the key upside risk to oil prices."