On March 10, a CNN source report said Iran has begun laying mines in the Strait of Hormuz. The strait is the world’s most important maritime route, as about 20% of global crude volumes pass through it. While not extensive, nearly 15 million barrels per day of crude production are stranded there now.
Why it matters: Oil futures are pricing in risk of permanent disruption, particularly now as three ships were hit on March 11, according to The New York Times. But while we’ve been surprised at how quickly the conflict has escalated, we still believe the actions amount to a longer logistical bottleneck.
- We continue to apply futures to our model’s next two-year outlook. But, on a probability-adjusted basis, we think it’s likely we’ll see over USD 100 per barrel Brent over the next 30 days as the market underweights the disruption from stranded crude.
- While we model some supply disruptions and demand destruction, we think the odds are highly likely that prices revert to our USD 65/bbl Brent midcycle over the next three years. Still, there’s a possible outcome where that wouldn’t be the case, namely that the conflict embroils Kharg Island.
The bottom line: We maintain our USD 65/bbl Brent midcycle price. Only in a remote probability and high-severity scenario where an attack on Kharg Island knocks Iran’s exports offline, or in a scenario where Iran carried out an impassible structural block, would we change this input.
- Kharg Island is responsible for 90% of Iran’s exports. Destroying this infrastructure would be analogous to destroying a bridge as opposed to the traffic jam that we think is a base case. While volumes are trapped, we think the US could eventually secure the strait if it chose to.
- In such a scenario, long-term, we think Saudi Arabia and the United Arab Emirates have enough spare capacity to help drive prices back to midcycle. A prolonged US-Iran conflict would likely only delay but not impair this outcome and would send oil prices higher.
