There is only so much you can say in the aftermath of a geopolitical thunderbolt like the assassination of Iran’s top military commander Qassem Soleimani. Reprisal attacks on western targets are all but inevitable, but the extent to which Iran’s response will affect global economic activity is impossible to say at this juncture.
However, at the risk of being accused of bad taste, there are some points worth considering from an investment angle, even though they might rely on conjecture to a certain extent.
In September, separate attacks on Saudi oil facilities, which some speculate were sponsored by Tehran, knocked out about 5 per cent of global supply. The resultant 14.7 per cent surge in the price of Brent crude was the biggest daily rise in a decade, with the spot price closing at $68.42 a barrel.
The sharp increase in crude prices following the drone attacks on Saudi Aramco's Abqaiq facility was essentially a matter of course, but the surprising aspect is that the effect was relatively short-lived, with Brent crude falling back to $57.92 within a fortnight as Saudi crude oil output quickly returned to pre-outage levels.
The price did retrace through the remainder of the year and is bobbing around the $68.90 mark at the time of writing – up 4 per cent following the US strike – but still 19 per cent adrift of Brent’s five-year peak in October 2018. And that’s despite output cuts designed to prop-up prices by the Organisation of the Petroleum Exporting Countries (Opec) and its allies such as Russia.
Not to be outdone, President Donald Trump vowed to release US reserves following the attack on the Saudi fields, but it is difficult to imagine that this singular measure would have allayed fears over a global supply shortfall. The US is now the world’s biggest oil producer with exports worth around $48.3bn in 2018. That’s equivalent to 4.3 per cent of the worldwide total, placing the US in eighth place in the international pecking order on that basis.
Unfortunately, the ability of the US to act as a global swing producer is compromised by the fact that it consumes so much of the black stuff domestically. Despite the stupendous growth of North American fracking, that distinction still belongs to the Saudis.
There is a problem, though. The September attacks not only knocked out 5.7m barrels per day (bpd) of crude output, but it effectively wiped out any spare capacity used to mitigate against any major disruption in oil supplies worldwide. Kuwait and the United Arab Emirates, along with other producer states, account for around 29 per cent of global spare capacity, but Saudi Arabia has been the mainstay with 71 per cent of the total.
Although forward contracts for crude are still being held in check due to fears over a global economic slowdown, the market is more finely balanced and susceptible to supply shocks than you might imagine, even though supply growth is expected to outpace demand growth through this year.
Figures from the US Energy Information Administration reveal that OPEC spare capacity fell to 1.23m bpd in September from about 2.23m bpd in the month prior to the Aramco attacks, mirroring the fall-away in Saudi production. To put this in perspective, global demand for crude oil is forecast to average 101.6m bpd through 2020.
The most obvious point of disruption is the Strait of Hormuz, “the most important choke point for the world’s oil industry”, accounting for around a quarter of global supplies. Iran is likely to resume harassment of commercial shipping in the narrow sea lanes, but it, too, is vulnerable to disruption in global energy markets, as its domestic economy might best be described as fragile following the sanctions imposed by Washington.
However, General Soleimani was the head of the Quds Force within the Islamic Revolutionary Guard, so retaliatory action is a given, and it is hard to sketch out any scenario which doesn’t lead to production outage. If Iran takes action that severely disrupts supplies from the Persian Gulf, it is entirely possible that the US may decide to cripple the Iranian economy, perhaps by tightening existing sanctions, or even by destroying its refining capacity. Conversely, it is certainly within Tehran's power to carry out further drone attacks against Saudi Arabia's oilfields, as the Desert Kingdom is deemed to be a key strategic ally of the US in the region.
