Why Middle East Crude Supply Has Remained Surprisingly Resilient Amid Escalating Tensions

Global Oil Markets – In the midst of the dramatic back-and-forth of air and missile strikes between Israel and Iran, it's easy to get swept up in the urgent headlines. However, for those closely watching the global crude oil market, the real story lies not in the immediate flashes of conflict, but in a crucial absence: the continued, uninterrupted flow of Middle East oil. As industry expert Russell keenly observes, sometimes, what isn't happening speaks volumes.

From an oil market perspective, the most salient fact remains that, to date, not a single barrel of crude oil supply has been lost due to the heightened regional tensions. Crucially, it appears to be in the shared interest of all parties involved to maintain this delicate equilibrium.

Despite this underlying stability in physical supply, global benchmark Brent futures saw a jump of 2.1% in early Asian trade on Monday, reaching $75.76 a barrel. This built upon a significant 7% leap on June 13th, which had propelled Brent to its highest in nearly five months. That surge followed a series of Israeli drone and air strikes targeting Iranian commanders, nuclear scientists, and facilities.

Interestingly, the reaction in the physical oil market in the Middle East was more subdued compared to the "paper" market (futures contracts). Dubai swaps, contracts settled against physical Dubai crude prices, rose a more moderate 5.8% on June 13th, closing at $71.03 a barrel. This gain of $3.86 a barrel for Dubai swaps contrasts with the larger $4.87 jump seen in Brent contracts. This less pronounced increase in physical oil prices might suggest that traders and refiners, who deal with tangible barrels, are perhaps less concerned about an immediate supply interruption than the investors in paper markets.

Nevertheless, both physical and paper oil prices experienced significant increases – a rational response to an escalating conflict that, for now, shows little sign of cooling, with ongoing Israeli attacks and Iranian missile barrages.

For the oil market, the paramount question revolves around the realism and imminence of direct attacks on Iran's crude production and export infrastructure, or, more dramatically, an Iranian attempt to blockade the Strait of Hormuz. This narrow, vital channel, nestled between the Persian Gulf, the Gulf of Oman, and the Indian Ocean, serves as the passageway for approximately a fifth of the world's daily oil consumption – up to 20 million barrels per day (bpd). It is the lifeline for crude and product exports from major OPEC members like Saudi Arabia, the United Arab Emirates, Kuwait, Iraq, and Iran, with few viable alternative routes. It also facilitates the export of liquefied natural gas (LNG) by Qatar, the world's second-largest LNG shipper.

It's a crucial historical note that despite numerous past conflicts plaguing the Middle East, the Strait of Hormuz has never been fully blocked. While Iran has, on occasion, boarded and detained tankers, a complete closure remains an extreme scenario. Some analysts even posit that Iran's current best strategy is to keep the market on edge about potential Hormuz disruptions, thereby maintaining an oil price premium, without actually taking steps to close the waterway.

The Hormuz Calculus: A "Nuclear Option"?

What if Iran were to pursue this "nuclear option" and attempt to close the waterway? Such a move would effectively halt its own crude exports, along with those of several other nations. Critically, it would almost certainly draw other global powers into the conflict. The United States would likely intervene to ensure the waterway remains open. Moreover, Iran would risk alienating its Gulf neighbors and, perhaps most significantly, China – the world's largest crude importer and effectively the sole major buyer of Iran's sanctioned oil. While Beijing typically eschews public diplomacy, it's safe to assume its views on de-escalation are being clearly communicated to both sides.

Washington's stance, though sometimes nuanced by public statements, appears consistent: they will support Israel's self-defense and only directly engage if Tehran targets U.S. personnel or interests. Similarly, Israel has, for now, limited its attacks to domestic Iranian energy infrastructure like refineries and storage tanks. These measures, while aiming to impose costs on Iran, appear designed not to disrupt crude production and exports.

This perspective is not intended to downplay the inherent risks to Middle East crude supply. Instead, it serves as a crucial reminder that even in highly volatile and dramatic situations, past conflicts have often led to surprisingly limited supply disruptions, and tensions, eventually, do tend to subside. The current stability in crude flow, rather than the headline-grabbing strikes, holds the key to understanding the oil market's immediate trajectory.