What to watch for as conflict in Iran creates volatility in oil market
Oil prices spiked following the joint U.S.-Israeli strikes against Iran over the weekend that killed Ayatollah Ali Khamenei, Iran’s supreme leader. On Monday, a TCU professor and petroleum industry expert identified what consumers can watch for in the coming days as they monitor price changes at the pump.
Last Friday, crude oil was trading at around $67 a barrel, said Tom Seng, an assistant professor of energy finance at TCU who analyzes petroleum markets. The price climbed to $75 a barrel Sunday night before dipping to around $71 on Monday, after the initial shock wore off.
At first, Seng said, the market was primarily worried about how much Iran’s oil production and export capacity would be affected. But then Iran launched retaliatory strikes in U.S.-allied countries like Kuwait, Saudi Arabia, Qatar and the United Arab Emirates, leading to fears about impacts to other oil-rich nations.
“I don’t think anyone expected Iran to attack countries other than Israel,” Seng said.
Those surprise Iranian strikes created more volatility in the marketplace, and it’s too soon to tell how long the attacks from both sides will continue and what it will mean for prices. Then there’s the anxiety about the Strait of Hormuz.
This narrow waterway on Iran’s southern coast connects the Persian Gulf with the Gulf of Oman. Through the Strait of Hormuz, tankers move roughly 20% of the global oil supply, said Seng. There’s been no blockade, but Seng said the threat of Iran attacking ships has been enough to reduce traffic in the strait, contributing to an increase in oil prices.
As of now, Seng pointed out, there’s been no significant, verified disruption to the flow of crude or to the energy infrastructures in Iran or its neighboring countries. Seng believes the price spike was a market overreaction, but he also said the market always operates with a “what if” mentality.
But there will need to be justification for the higher prices, Seng said. If the data shows oil isn’t moving through the Strait of Hormuz, or if oil exports are impacted because of infrastructure damage in Iran and other oil-producing countries, there will be no reason for prices to fall.
Why this won’t be like 1979
When oil production declined during the Iranian Revolution in 1979, it led to gasoline shortages and skyrocketing prices in the U.S.
Regardless of what happens this time around, though, Seng said it’s unlikely we’ll see a repeat of that crisis. That’s because the U.S. has become the world’s largest oil producer over the past decade or so. Last year, domestic production reached a record high of 13.6 million barrels a day. As of last week, said Seng, the U.S. was producing 13.7 million barrels a day.
Seng said the U.S. needs between 16 and 18 million barrels per day to meet refinery demand, depending on the time of year. Only three to five million barrels a day are imported, and half of that comes from Canada via pipeline, so it’s not as vulnerable to disruptions.
Additionally, Seng said the U.S. has approximately 435 million barrels of oil in reserve storage for commercial use and roughly 715 million barrels in strategic reserves.
“Is the United States going to run out of oil? No” Seng said.
Still, prices could continue to rise. President Trump said military action in Iran could last four to five weeks. But if it extends beyond that, or if American military boots end up on the ground in Iran, we could be looking at a long-term market shakeup.