What’s at stake for oil prices if Iran crisis escalates

Singapore - Oil traders are watching for any escalation of the

civil unrest in Iran

that could disrupt the country’s crude production or prompt the government to block the Strait of Hormuz, a key waterway for several major Middle Eastern energy exporters.

The mass protests, triggered by a

currency crisis and economic collapse

, pose the biggest threat to the rulers of the Islamic republic in decades and have been met with a deadly crackdown. More than 500 people have been killed so far and thousands arrested.

US President Donald Trump has said the US is “looking at some very strong options” to respond to the killing of demonstrators. He has been briefed on options for military strikes, according to a White House official. Should the US or ally Israel intervene, this could draw neighbouring countries into the crisis and threaten access to the strait that handles around a quarter of the world’s seaborne oil trade.

How significant is Iran’s oil industry?

Its influence has diminished in recent years due to prolonged sanctions and limited foreign investment. Overall, the country accounts for about 3 per cent of global supply, producing roughly 3.3 million barrels a day.

Iran began developing its oil industry at the start of the 20th century, under the watch of a British government eager to secure reliable supplies. Decades later, the nation became a founding member of the Organisation of Petroleum Exporting Countries (OPEC) and rose to become the group’s second-largest producer. At its peak in the mid-1970s, Iran ranked among the world’s most important oil suppliers, responsible for more than 10 per cent of global crude production.

That dominance unravelled after the 1979 Iranian revolution, when the new regime expelled foreign companies from the oil industry, curbing investment and outside expertise. The country’s crude output slumped and never reached peak levels again.

The Islamic republic did ramp up exports after the Iran-Iraq War ended in the late 1980s, to support economic growth. European and US majors eventually sought to re-enter the sector. But those efforts collapsed in 2018, when the first Trump administration pulled out of the Iran nuclear deal – an international agreement to limit and monitor the nation’s nuclear programme in exchange for sanctions relief – and reimposed sanctions. 

Today, Iran’s slice of the global oil market has been sharply reduced, constrained by its own size and rising output from other producers. The country now ranks fourth within OPEC, behind Saudi Arabia, Iraq and the United Arab Emirates, according to December production data.

Who buys Iran’s oil?

In the face of international sanctions, Iran now relies on China to take about 90 per cent of its crude exports, which are sold to independent refiners at a steep discount. 

While official Customs data suggests China has not imported Iranian crude since mid-2022, these barrels are shipped via opaque trading networks and a “dark fleet” of mostly ageing tankers.

Other countries that have continued to buy Iranian cargoes include Syria.

How could unrest in Iran affect oil prices?

A large share of Iran’s production, around two million barrels a day, goes to Chinese refineries, which would be forced to seek alternative supplies in the event of major disruption. However, a bigger concern is if tensions spill over into the wider region, which forms the backbone of global oil supply. Saudi Arabia, Iraq, the UAE and Qatar are all located within the Persian Gulf and export crude via the Strait of Hormuz.

Traders, who are already grappling with the fallout from the US intervention in Venezuela, have factored in some of those risks. Brent futures prices have edged higher in the days since the US staked a claim on Venezuelan oil, and West Texas Intermediate, the US benchmark, has risen alongside. 

Still, prices have remained contained around the low US$60s for Brent, not far from 2021 lows. A well-supplied crude market has kept extreme price swings in check.

Why is the Strait of Hormuz so important?

The Strait of Hormuz is the narrow waterway that connects the Persian Gulf with the Arabian Sea. The Iranian government previously said it has the ability to impose a naval blockade during periods of heightened geopolitical tension, though it has yet to effectively block the waterway.

If it were to disrupt this key trade chokepoint, shipments of oil, liquefied natural gas and liquefied petroleum gas from Iraq, Kuwait, Saudi Arabia and the UAE would be at risk. 

Some 16.5 million barrels of oil a day flow through the strait, including the bulk of Iran’s exports. Saudi Arabia exports the most via the waterway, at roughly five million barrels a day, but it can divert shipments by using a 1,200km pipeline that runs across the kingdom from east to west to a port in the Red Sea, where the oil is loaded onto vessels for onward transport. The UAE can likewise bypass this chokepoint by moving its 1.5 million barrels a day through a pipeline that ends at the Gulf of Oman.

A shutdown of the Strait of Hormuz would likely disrupt Asia-bound oil flows from the Middle East. In June, when tensions in the region escalated during a 12-day conflict between Israel and Iran, the benchmark rate for a supertanker carrying two million barrels of crude from the Middle East to China spiked.

How important is oil for Iran’s economy?

Oil exports remain a central pillar of the economy, despite years of efforts to reduce dependence on crude and diversify into heavy industry, textiles and mining.

While sanctions have forced Iran to export its oil at steep discounts to international benchmarks to attract buyers, the country still earned an estimated US$2.7 billion (S$3.5 billion) in revenue in November alone, based on Bloomberg calculations using a discounted oil price of US$45 a barrel, after accounting for shipping and other costs. BLOOMBERG