What an attack means for oil markets
General view of the Kharg Island Oil Terminal Port in Iran on March 12, 2017, 25 km from the Iranian coast in the Persian Gulf and 483 km northwest of the Strait of Hormuz.
Fateme Bahrami | Anatolia | Getty Images
President Donald Trump’s order to strike Iranian military assets on Kharg Island has thrust one of Tehran’s most critical oil hubs into the center of the escalating US-Iran conflict.
Trump said Friday night’s attacks targeted military facilities and protected oil infrastructure. But he warned that the United States could attack crude oil facilities on the island if Iran continues its attacks on commercial ships in the Strait of Hormuz, a key shipping artery for global energy supplies.
“The attack on Kharg’s military facilities was intended to be a warning shot to Tehran. If it does not reopen the Strait of Hormuz, it will be the turn of the oil infrastructure on the island,” Vandana Hari, founder of Vanda Insights, said in an email to CNBC on Monday.
Kharg Island is considered one of Iran’s most sensitive economic targets. The 5-mile-long coral island, located in the northern Persian Gulf, about 15 miles off the coast of mainland Iran, accounts for about 90% of the country’s crude oil exports. It also has a loading capacity of approximately 7 million barrels per day, making it a critical gateway for Tehran’s energy revenue.
Iran’s economic lifeline
A direct hit on Iran’s export terminal on the island would cause most of its 1.5 million barrels per day of crude oil exports to stop immediately. Data provided by JPMorgan showed.
“The destruction of the oil infrastructure will take years to rebuild, depriving the country of its most critical source of income,” Hari said. he added.
“War risk insurance premiums are likely to remain high long after the last missile is fired. And behavioral responses… [will] It permanently reprices the supply chain.”
Jeff Currie
Energy Pathways Chief Strategy Officer, Carlyle
Energy analysts said Washington’s focus on Kharg Island reflects both the island’s strategic importance to Iran and its influence on global oil markets.
“Iran has other ports, but presumably if the United States takes control of or destroys Kharg Island, it would be possible to do the same to other export facilities,” said Josh Young, chief investment officer at Bison Interests.
Damage to the facility could significantly disrupt exports, but Iran has some limited alternatives, said Andy Lipow, president of Lipow Oil Associates.
Lipow noted that Iran could use the Goreh-Jask pipeline, which can carry approximately 1.5 million barrels per day, bypassing both Kharg Island and the Strait of Hormuz.
Despite this, analysts warned that attacks on Kharg Island would still represent a major escalation.
“[Tehran] Edward Fishman, a senior fellow at the Council on Foreign Relations, said he would escalate by attacking more energy infrastructure in the region, such as Abqaiq in Saudi Arabia, referring to the kingdom’s massive oil processing facility.
Carlyle’s Jeff Currie said the dispute was accelerating structural change in the pricing of energy supply chains.
Former Goldman Sachs commodities chief says damaged infrastructure on Kharg Island cannot be repaired under fire wrote in a note.
“War risk insurance premiums are likely to remain high long after the last missile is fired. And the behavioral response – hoarding, contract renegotiations, scrambling for alternative suppliers – is permanently re-pricing the supply chain,” he added.
Currie said the world is moving towards a new energy paradigm where security risks are factored into commodity prices.
Crude oil prices rose above $100 per barrel on Monday. International benchmark Brent prices increased by 0.88% to $104 per barrel as of 21:48 (UTC).
“Any commodity that must pass through a chokepoint will likely carry a safety premium,” Currie wrote.
For oil markets, this means the threat to Kharg Island could be almost as significant as an actual attack.
— CNBC’s Sam Meredith contributed to this report.
