Jordan Blum
5 min read
Crude oil prices, maybe surprisingly, dipped modestly on Monday after spiking at the end of last week, even as Iran and Israel continue firing missiles at each other with no easy end in sight.
The U.S. oil benchmark hovered around $71 per barrel on June 16—about where it started the year—but up roughly 9% from a week prior. The current price tag is considered a relatively healthy value—profitable for most oil producers without creating particularly high fuel prices.
So, even though Israel successfully targeted some of Iran’s oil and gas infrastructure over the weekend, oil markets have stayed relatively calm, and Iran, which is not in a position of strength, is reportedly signaling its interest in returning to nuclear negotiations with the U.S.
Why? Here are four takeaways:
Israel struck Iran’s South Pars gas field, the Shahran fuel depot, and the Shahr Rey oil refinery, but all of these targets are for domestic fuel and power consumption, and not global exports. That contributed to a run on fuel and potential shortages within Iran, but it has much less impact on global oil markets and Iran’s roughly 1.5 million barrels per day of crude oil exports.
“Everybody is taking a hands-off approach to oil [exporting] infrastructure because it meaningfully complicates and escalates the situation,” said energy forecaster Dan Pickering, founder and chief and investment officer for Pickering Energy Partners consulting and research firm. “Israel doesn’t want to do that, and I don’t think Iran does either.”
On the other hand, Pickering told Fortune. “You’re one stray bomb away from a problem. If you get to a point where people stop acting rationally, things get crazy quickly.”
That’s why the range of outcomes is vast from $55 per barrel oil if things calm down—a low price that hurts the bottom lines of oil producers—up to $120 or so if war escalates and overall OPEC production is impacted, Pickering said.
Iran sits next to the Strait of Hormuz, and the exports through that relatively narrow body of water account for about 20 million barrels daily, or one-fifth of global consumption. Impacting those flows changes everything.
To be clear, oil at or above $120 per barrel is bad for almost everyone because skyrocketing fuel costs would trigger widespread demand destruction around the world.
The so-called OPEC+ group increased their monthly quotas, essentially aiming to grow production by more than 2 million barrels daily by the end of the year, and undoing years of self-imposed curtailments.
