After lots of saber-rattling in recent weeks, the U.S. and Israel launched military strikes against Iran over the weekend. The escalating conflict could significantly impact the oil market. Several analysts are predicting that oil prices could surge to $100 a barrel following the attacks (oil was in the low-$70s before the strikes).
While oil might hit $100 a barrel, it probably won't stay there for very long. Here's a look at why oil might spike and several factors that could eventually ease pressure on crude prices.
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Why oil might hit triple digits
Iran plays a meaningful role in the energy market. It produces about 3.3 million barrels of oil per day, or roughly 4.5% of global supplies. Iran is also a founding member of OPEC and currently its third-largest producer. It also has a massive natural gas resource (South Pars field). While the field primarily supplies gas consumed in Iran due to sanctions and technical constraints, it's big enough to meet the world's entire gas needs for 13 years.
The military attacks on Iran could severely limit its ability to produce oil. The Middle Eastern nation could also use crude oil as a weapon. It might attempt to stop oil from flowing through the Strait of Hormuz in the Persian Gulf. More than 20% of global oil supplies move through that key oil chokepoint each day. Additionally, Iran's military could target the oil infrastructure of large oil producers in the region.
The risk to Iran's exports and the region's oil supplies is fueling the view among analysts that oil prices could reach $100 a barrel. Ajay Parmar, Director of energy and refining at ICIS, told Reuters, "We expect prices to open (after the weekend) much closer to $100 a barrel and perhaps exceed that level if we see a prolonged outage of the Strait." Meanwhile, RBC analyst Helma Croft also sees the potential for oil prices to surge into the triple digits.
These catalysts could take the pressure off crude prices
While the risk of a return of triple-digit oil prices is rising, oil might not remain high for long. An easing of tensions in the Middle East would help calm market fears and reduce the oil price risk premium.
Additionally, while Iran is a member of OPEC, that organization likely won't come to its aid. Instead, OPEC could increase its supplies to help offset potential disruptions in Iran. OPEC recently agreed to increase its output by 206,000 barrels per day starting in April. It has the spare capacity to further increase its production, assuming its oil infrastructure remains intact.
On top of that, the U.S. could intervene in the oil market by releasing oil from the strategic petroleum reserve. The U.S. currently holds about 415 million barrels of oil, which it can draw from to help ease the impact of a price surge. The U.S. used this stockpile in 2022 following Russia's invasion of Ukraine to help calm market fears.
More help could be on the way
Meanwhile, many U.S. producers have the flexibility to ramp up their capital spending in response to higher oil prices to boost their production. Newly drilled shale wells in places like the Permian Basin can start producing in a matter of months.
Most U.S. producers had reduced capital spending in response to lower oil prices last year. However, they can quickly ramp back if the market needs more crude oil. For example, Occidental Petroleum (OXY +5.68%) plans to reduce its capital spending by $550 million this year to a range of $5.5 billion-$5.9 billion. As a result, the oil company expects to keep its production roughly flat with last year's level at less than 1.5 million barrels of oil equivalent per day. However, the company has the resources and the flexibility to adjust its capital spending and activity levels as market conditions change. If oil prices surge, Occidental could increase its capital spending to drill more wells.
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Key Data Points
While it could take some time before new U.S. supplies hit the market, as output grows, it would help take some of the pressure off crude prices.
Likely a short-term surge
The military strikes on Iran will undoubtedly drive up crude prices in the near term, potentially pushing them above $100 a barrel if analysts' predictions prove correct. However, the price spike could be short-lived. OPEC and the U.S. government could intervene by adding supplies. Meanwhile, U.S. producers such as Occidental Petroleum could increase capital spending to boost production. These factors should help ease fears that oil prices will remain in the triple digits if they reach that level.
