The areas under threat amid escalating Middle East tensions

Many rumours are circulating about how Israel could respond to Iran’s missile attack earlier last week by targeting Iran’s infrastructure.

We have discussed in recent days how Israel is unlikely to target Iranian energy infrastructure yet, but the Ababan refinery seems a possible target if it were to do so. Targeting a refinery would hurt Iran in several ways - not only reducing gasoline supply to its domestic market but also freeing up crude supply. Given sanctions, Iran already struggles to find buyers for its crude, with the vast majority heading to China; hence, if Abadan were to be taken out of commission, Iran would only have China as a plausible buyer of this excess crude. This would, in turn, have a downward influence on oil prices if anything, as China would reduce its crude purchases from other sources to buy Iran’s likely heavily discounted barrels.

US President Biden, whose team is said to be in consistent contact with Israel, has cautioned against targeting oil fields. By this, he may mean oil storage as well as oil fields – and maybe, in a roundabout way, agree with our logic that targeting a refinery instead is the best way to hurt Iran. If storage were the target, onshore inventories at Kharg Island would be the obvious choice.

Kharg Island crude oil storage

Source: Kpler

Iran has approximately 50 Mbbls in onshore crude inventories, and of this, some 40%, or 20 Mbbls, is in tanks at Kharg Island. Iran exports the vast majority of its crude from Kharg Island. Hence, if Israel wanted to bring Iran’s export revenues to a standstill, this would be the target to hit. If this were to happen, this could stoke broader animosity, given that Iran (or Iran’s proxies) could retaliate and punish other countries in the region as retribution against Israel. Such a concern prompted the Gulf Cooperation Council (GCC) to release a statement later last week condemning escalation in the region and calling for restraint, as well as for an immediate ceasefire in Gaza. If Kharg were to be hit, the outsized impact would be on China, given it is virtually the sole recipient of Iranian crude, a message that China is likely trying to get across to Israel.  

Iran onshore crude inventories, Mbbls

Source: Kpler

If Iran's energy infrastructure were attacked, the market is concerned that Iran could retaliate by blocking the Strait of Hormuz. While such a scenario leads to fantastical oil price targets from some analysts, the reality is that the area is so well-patrolled and guarded that any potential disruption would be short-lived. Granted, a lot of barrels are at stake: despite the OPEC+ production cuts, more than 14 Mbbls of crude still traverse the Strait of Hormuz every day from the Mideast Gulf, let alone clean products and fuel oil. In such a scenario where the Strait is blocked, Saudi Arabia is the only producer in the Mideast Gulf that can pipe its crude to another loading point outside the Mideast Gulf. In fact, Saudi Arabia built the East-West pipeline in the 1980s for precisely this reason: it was concerned that the Iran-Iraq war would cut off flows through the Strait of Hormuz.

However, while Saudi Arabia can redirect ~5 Mbd of its crude exports (a similar level to what is currently being exported from Ras Tanura and Juaymah on the East Coast) into the East-West pipeline (which has a capacity of 5 Mbd), it appears not possible to load such a high volume on the West Coast of Saudi Arabia. After all, our records show that there have never been more than 2 Mbd loaded on the West Coast of Saudi Arabia on a weekly basis. This is even before considering the availability of VLCCs to load the crude onto or that it will be heading south through the Red Sea and need to run the gauntlet of passing Bab el Mandeb in its journey to Asia.    

Saudi East-West Pipeline from Mideast Gulf to Red Sea

Source: Kpler

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