Oil May Extend Gains As Conflict Threatens Deeper Gulf Supply Losses

RIYADH: Oil prices may extend gains when markets reopen on Monday as the US-Israel-Iran conflict enters a third week, with fresh attacks on energy infrastructure and continued disruption in the Strait of Hormuz threatening the largest global oil supply shock in years. 

Analysts warn crude could remain above $100 per barrel following the latest escalation, raising fears of a prolonged energy shock and a sharp hit to consumers’ real incomes. 

The escalation follows US strikes on military targets near Kharg Island, Iran’s main crude export hub, and subsequent Iranian drone attacks on a major oil terminal in the UAE, intensifying concerns over supply security across the Gulf. 

Brent Crude and West Texas Intermediate have already surged more than 40 percent this month to their highest levels since 2022 after Iranian authorities halted commercial shipping through Hormuz, a route that normally carries about one-fifth of global oil supply, Reuters reported. 

Against that backdrop, JPMorgan said a global oil supply shortfall of about 7 million barrels a day caused by the conflict can only be offset by an equivalent decline in consumption. 

Aside from a roughly 400,000 barrel-a-day drop in demand linked to reduced air travel in the Middle East, global consumption has remained largely intact, the bank said in its latest analysis. 

“The impact on the oil supply would likely be limited. If loading jetties, storage tanks, and pipelines remain intact, Iran’s export capacity would be largely unchanged, and the country could still ship roughly 1.5-1.7 million bpd of crude. Any disruption would likely be temporary and precautionary,” said JPMorgan. 

The analysis, however, warned that the attack on Kharg marks a new escalation in the conflict, because the island is a cornerstone of Iran’s economy and a major source of revenue for the Iranian Revolutionary Guard. 

In the days leading up to the US-Israeli attack, Iran ramped up exports from Kharg Island to near-record levels, loading over 3 mbd between Feb. 15 and Feb. 20, nearly triple the normal export pace of around 1.3-1.6 million bpd, suggesting Iran was accelerating shipments ahead of the anticipated escalation. 

Citing data from Kpler, JPMorgan added that the storage capacity on Kharg Island is estimated at roughly 30 million barrels. Some 18 million barrels of crude are currently stored on the island, equivalent to roughly 10-12 days of exports under normal conditions. 

“If Kharg Island were disabled, the loss of its storage buffer and the scarcity of viable export alternatives would rapidly trigger upstream shut‑ins across major southwest fields. With production near 3.3 million bpd and exports around 1.5 million bpd, as much as half of national output could be at risk if the hub remains offline, and the previously assumed 20‑day buffer would vanish from day one,” said the report. 

The analysis added that the global market is currently facing an acute shortage of products, including diesel, jet fuel, and liquefied petroleum gas, as well as naphtha, as they are not available. 

According to JPMorgan, the oil market is beginning to feel the physical reality of a supply disruption, as the war enters its third week. 

Cargoes that departed the Gulf before the Strait’s closure are still arriving at their destinations, but new shipments have largely stopped. 

As a result, incoming supplies are running dry and could be exhausted by the end of this week for Asia-bound shipments and by the end of next week for Europe. 

The report also warned that crude oil supply cuts are on track to reach nearly 12 million barrels per day by the end of this week, making the deficit highly visible across physical markets. 

In India, struggling to meet domestic LPG demand, the government invoked emergency powers, ordered refiners to maximize LPG production, and cut industrial sales to protect household supply. 

In Sri Lanka, long queues formed at fuel stations as fears of shortages returned; authorities said stocks were still available but moved to stop hoarding. 

Myanmar has already imposed fuel rationing for private vehicles, citing shipping disruptions. 

Gulf shut-ins could reduce regional crude output by 70% 

In a separate release, Rystad Energy said that Gulf shut-ins could reduce regional crude output by 70 percent if the US-Iran war drags on. 

“In just over a week since the US-Israeli strikes on Iran triggered the closure of the Strait of Hormuz, more than 12 million barrels of oil equivalent per day (boepd) of Middle East oil and gas production has been taken offline, including 7 million bpd of crude supply – equivalent to roughly 7  percent of total global liquids demand,” said Rystad Energy. 

According to the report, Iraq has been hit hardest, with over 60 percent of its pre-conflict volume curtailed. 

Projecting a worst-case scenario, Rystad Energy said that Middle East crude output could fall to approximately 6 million bpd, a region-wide reduction of 70 percent from the pre-conflict baseline. 

“Further cuts from major Middle East oil producers cannot be ruled out as storage tanks fill to the brim, bypass infrastructure approaches its limit, and the conflict shows no sign of a near-term resolution. Although the likelihood of oil supply falling to 6 million bpd is not our central case, it is still very much in the cards,” said Aditya Saraswat, research director for the Middle East and North Africa region at Rystad Energy. 

He added: “If and when the crisis reaches an end, it will take months to restore operations to pre-conflict levels, with the questions of infrastructure integrity and a recalibrated geopolitical order still at play.” 

According to Saraswat, a potential winner in this geopolitical turmoil could be Russia, which could provide some additional barrels, as stronger drilling activity may lift Urals supply by around 200,000 to 300,000 bpd, but even that would only cover a fraction of any potential loss of Iranian crude. 

The research director added that there are no viable replacements for Arab Heavy and Arab Medium in the near term, triggering a historic supply crisis if the conflict is not resolved in the coming weeks. 

Oil prices to affect consumers’ real income 

In a separate study, Oxford Economics said oil prices above $100 per barrel would deal a significant blow to consumers’ real incomes and weigh on spending growth this year, offsetting the fiscal boost from larger tax refunds. 

“With the disruption to global energy supplies more widespread and persistent than we assumed in our March baseline, we will revise our growth forecasts lower in our second March baseline,” said Michael Pearce, chief US economist at Oxford Economics. 

He added that the war adds to the case for the Federal Reserve to remain on a prolonged hold while it awaits more evidence on whether the risks to inflation or the labor market dominate. 

“We think the inflation backdrop is different now than it was in 2022 and officials are likely to pay more attention to the labor market. If the disruption to employment grows large enough, the Fed would be likely to lower rates more aggressively,” said Oxford Economics. 

Tensions continue 

South Korea’s presidential office said on March 15 that it would carefully review US President Donald Trump’s calls on allies to send warships to secure the Strait of Hormuz, Reuters reported. 

“We will communicate closely with the US regarding this matter and make a decision after careful review,” the office said in a statement. 

Citing an industry source, Reuters reported that loading operations at the UAE’s Fujairah emirate have resumed following a drone attack and fire on Saturday. 

Fujairah, located outside the Strait of Hormuz, serves as a key outlet for around 1 million bpd of the UAE’s Murban crude oil, accounting for approximately 1 percent of global demand.