Extending the Conflict Timeline
As the conflict between the U.S., Israel and Iran extend into a second month and the potential of U.S. troops arriving on the ground seemingly takes shape, the risks to our original timeline have been upgraded.
The OPIS assumption has been updated to eight weeks (previously six weeks) as possible military ground action around the Strait of Hormuz or Kharg Island (or both) adds to the expected timeline which brings a potential resolution near April 20. We assume that there will be 12-week recovery period that will bring supply towards a normalization of output and trade.
From late April through mid-May, during the first four weeks of recovery we see crude oil from wells not damaged starting to gradually return to production. Marine transit also slowly recovers during this four-week stretch following a confirmation that mines are no longer a threat. Shipping from ports and storage tanks not damaged also begin to increase operations. Feed to refineries that were shutdown also recover during this period, however it will take several weeks for refineries to begin producing “on-spec” fuels.
The next four-week phase sees a near full recovery of marine transit by the end of week eight (mid-June). Refining operations in assets that have not been damaged are closer to running at pre-war levels. Those that have been impacted have likely seen necessary repairs made and are in the restart process. Finally regional crude oil production continues to recover and will be estimated to be at 80% of pre-conflict levels.
The last four weeks of the 12-week recovery period from late June to mid-July sees a full recovery of marine transit in crude oil and refined products. Refining capacity that had restarted earlier in the recovery window are at pre-conflict levels. The exceptions are refineries in Iran and perhaps one to three in Kuwait and Saudi Arbia.
The final piece on crude oil production is that the main Persian Gulf countries, Saudi Arabia, Iraq, Kuwait and UAE, are all producing at pre-conflict levels. At this point, those countries will also be expected to be pushing production higher to fill any gaps in lost Iranian crude oil which is not expected to return to any normal production for several months from this point.
We make several assumptions in the eight-week conflict and 12-week recovery timeline. We anticipate that there was no significant damage to oil fields in the region and that there is no additional refinery damage beyond what has already been reported. The final assumption is that Iran is not able to set up marine mines in the Strait of Hormuz beyond what may have already been planted.
There are also some risks to our current line of thinking.
As the conflict extends to eight weeks, our current assumption, producing countries like Saudi Arabia, Kuwait and the UAE will need to shut in production beyond current levels as storage tanks fill. This, however, is something we believe will be recovered in the 12-week recovery period provided there is no additional attacks or damage.
A conflict lasting as long as we expect could lead to the IEA announcing further strategic releases. That would help partially rebalance markets, but in the medium term be a bullish outcome as there will be additional tightness and vulnerability to global markets.
Announcements of crude production declines or stock releases could underpin crude prices as well as increase volatility leading to more violent moves in crude oil markets.
— Reporting by the OPIS Energy Macro Services team