FACTBOX: Iran's missile attack on Israel spikes oil, gas, shipping market risks

Crude prices rallied Oct. 1 and global energy markets were on tenterhooks after Iran launched a new missile attack on Israel, sparking concerns of a major regional escalation and a direct conflict between Israel and Iran.

Iran fired waves of missiles after the Israeli military launched a limited ground operation in Lebanon. The ground offensives follow Israeli attacks on oil storage and energy infrastructure at Red Sea ports in Yemen and an attempted drone attack by Houthi rebels on Israel's Karish gas field in recent days.

Israeli military estimated around 180 missiles were launched from Iran, although Israeli officials said there were no fatalities, according to press reports.

Oil prices came off their session highs after the attacks ceased as Iranian leadership indicated they were limited in scope and not expressly intended to draw the region deeper into war. Likewise, US State Department spokesman Matt Miller said the US has been working to avoid a broader regional war.

Still, according to a Wall Street Journal report citing "Arab officials," Israel told Iran it would retaliate to "any hit on Israeli territory," and would "directly hit Iran's nuclear or oil facilities."

Iran -- a major crude oil producer and supporter of Hezbollah in Lebanon, Hamas in Gaza and Houthi militants in Yemen -- had threatened to retaliate for the recent killing of Hezbollah leader Hassan Nasrallah.

"The attack by Iran through missile strikes into Israel escalates the existing conflict between Israel and Hezbollah and Israel and Hamas, and likely puts at least some Israeli oil infrastructure, including 287,000 b/d of Israeli refining capacity, at greater risk," oil analysts at S&P Global Commodity Insights said in a note.

Shipping transits via the key Bab al-Mandab Strait also slumped to the lowest since Oct. 7, 2023, the start of the Israel-Hamas war and a day before Houthi militants hit two vessels in the Red Sea, data shows.

Prices

NYMEX November WTI settled $1.66 higher at $69.83/b, following a rally to $71.94/b, and ICE December Brent climbed $1.86 to $73.56/b, after rallying to $75.45/b. Earlier in the day, the benchmark had been trading lower on the day following reports that OPEC and its allies may begin raising crude production into a well-supplied market in the coming months.

• Platts, part of S&P Global Commodity Insights, assessed Dated Brent at $75.38/b on Oct. 1, up from the near three-year low of $70.56/b Sept. 10.
• Crude prices in general have been tracking down since July, in part reflecting a slowdown in the Chinese economy. Middle East benchmark Platts Dubai was assessed at $70.77/b on Oct. 1, down $2.56 on the day.
• Platts assessed jet fuel/kerosene FOB Arab Gulf at $78.37/b on Oct. 1, below the 2023 peak of $124.48/b in September, before fighting in the region started.

Shipping rates in the region have seen an uptick, while Israel is a key gas supplier to Jordan and Egypt, with potentially vulnerable offshore infrastructure. Lebanon, meanwhile, relies on fuel imports to generate electricity but has struggled with payments due to an economic crisis. The two countries have also been mired in a maritime boundary dispute that has impacted the development of Lebanon's potential gas resources.

LNG and freight markets have largely absorbed the political risk premium after surging following the initial attack on Israel by Hamas in October 2023.

• The TTF month-ahead price rose by more than Eur1.30/MWh on news of Iran preparing an attack on Israel, reaching Eur38.90/MWh as of 1500 GMT, according to ICE data.
• LNG prices have crept up in the course of 2024 after falling from extreme highs in the aftermath of Russia's full-scale invasion of Ukraine. The Platts JKM benchmark for October was assessed at $13.25/MMBtu on Sept. 30.
• That compares with more than $19/MMBtu on Oct. 18, 2023, a nine-month high at the time, after Hamas attacked Israel, with the threat of Australian industrial strikes also feeding into the increase.
• In shipping, freight costs to move gasoline and diesel from the Middle East have been edging up in September. The cost to ship clean products on a Long Range 2 vessel from the Gulf to Europe was assessed at $56.20/metric ton on Sept. 30, up from $45.47/t Sept. 2, according to Platts assessments.

Infrastructure

Iran's attack against Israel was similar in scope and scale to the one in April. In that attack, more than 300 projectiles -- including some 170 drones, 30 cruise missiles, and over 120 ballistic missiles -- were fired toward Israel but almost all of them were intercepted by the aerial defense systems of Israel and its allies, including the US and the UK.

Any impact on Israel's gas infrastructure of a wider conflict with Hezbollah would have regional as well as domestic implications.

• Israel is a significant gas producer and regional exporter, with output having reached a record high of 24.7 Bcm in 2023, according to Israeli energy ministry data published in May.
• Production rose further in the first half of 2024, and was up by 7% on the year, at 13.1 Bcm, suggesting it is on track for record production in 2024.

Israel produces gas from three offshore fields -- Tamar, Leviathan and most recently Karish.

• Gas from Karish is produced via the 8 Bcm/year capacity Energean Power FPSO for supply to the domestic Israeli market.
• The platform through which gas from Tamar is delivered to shore is off southern Israel, while gas from Leviathan and Karish reaches land further to the north closer to the border with Lebanon.
• In the immediate aftermath of the Oct. 7 attacks, the Israeli government ordered the closure of the Tamar platform as a precautionary measure. It resumed operations one month later.

Israeli oil refineries could be impacted by an escalating conflict.

• Its two refineries are the 197,000 b/d Haifa plant owned by Bazan Group, and the Paz Group-owned 110,000 b/d Ashdod refinery.

Lebanon has no gas production of its own and relies on fuel imports for electricity generation.

• Lebanon, whose currency has lost over 90% of its value against the US dollar since 2019, has struggled to pay for power generation fuel imports for nearly five years, and experienced a total blackout in August.
• World Bank-backed plans from 2022 to secure gas from Egypt and Jordan via Syria faltered as Lebanon failed to make the necessary reforms to unlock financing. The project would add up to 700 MW of power to the country's grid, up from a current 600 MW.
• In September, Lebanon issued a tender to swap Algerian fuel oil with gasoil to power its Zahrani power station.
• The country has idled its two power plants that can burn Algerian fuel oil -- cargoes of which arrived in September as aid -- but will be unable to restart them for months, Walid Fayad, the country's caretaker energy and water minister, told Commodity Insights.

Offshore exploration wells drilled in 2020 and 2023 in Lebanon's Block 4 and Block 9, respectively, were reportedly unsuccessful, but the country is pressing on with a third exploration bidding round.

• Block 9, being explored by a TotalEnergies-led consortium, is located in the south of Lebanon, straddling the Israeli maritime border and is less than 10 km from the Israel's Karish field.

Trade flows

Hezbollah ally Iran is a member of OPEC and a major crude exporter, sending much of its volumes to China, despite heavy US sanctions. In April, Iran launched a major air strike at Israel after its consulate in Damascus was struck.

• Iran produced 3.18 million b/d of crude in August, according to the latest Platts OPEC+ survey, up 600,000 b/d from two years ago.
• The Persian Gulf region, of which Iran is a part, is a vital source for around a fifth of global oil exports, as well as Qatari LNG.
• In Yemen, Iranian-backed Houthi rebels have stepped up attacks on Red Sea shipping that began in late 2023. More than 70 ships have been targeted in the Red Sea, Bab al-Mandab Strait and Gulf of Aden since the start of 2024, according to the Energy Security Sentinel by Commodity Insights.

Middle East jet fuel demand has risen as a result of the ongoing Israel-Hamas war in Gaza and intensified military exchanges with Hezbollah in Lebanon, as planes avoid air space in the region.

• Air cargo demand in Africa jumped 20% year on year in April while it was 6.4% higher in the Middle East over the same period, according to IATA.
• Middle East jet fuel/kerosene demand is projected to average 577,000 b/d in the fourth quarter, up 7.9% or 42,000 b/d year on year, according to Commodity Insights.

Israel is a key regional gas exporter, with Egypt particularly reliant on its supplies to meet domestic demand. Without Israeli gas, Egypt would have to import more LNG cargoes on top of those it has already contracted to take, further tightening LNG markets.

• In 2023, it exported some 11.6 Bcm of gas to Egypt and Jordan, up 25% year on year.
• The majority of Israeli gas exports to Egypt flow through the offshore EMG pipeline, although a new onshore route, through Jordan, also opened up in March 2022.
• The EMG line started operations in 2008 to flow Egyptian gas to Israel and ran until 2012 when operations were halted as Cairo's gas production began to decline after the Arab Spring the previous year.
• The pipeline was then reversed in 2019 to enable Israel-Egypt flows, with large-scale Israeli gas exports beginning in 2020 following the launch of the giant Leviathan field in December 2019.