The potential Israeli response to the recent attack by Iran is a source of significant uncertainty, particularly in assessing its impact on oil markets. How Israel decides to react could play a pivotal role in either escalating or containing the situation, thereby influencing the global oil supply risk perception.

There are several factors to consider when evaluating Israel’s potential course of action. The precise nature of Iran’s attack, which seems calculated and constrained, suggests that a limited Israeli response may be forthcoming. This approach would align with Iran’s recent actions and statements that indicate a desire to avoid a broader conflict. Moreover, the global community is actively seeking to de-escalate tensions, as underscored by President Biden’s commitment to a diplomatic resolution in collaboration with G7 nations. This diplomatic angle could mitigate the chances of a military escalation.

Contrastingly, this recent assault marks the first direct attack by Iran on Israeli soil, which may compel Israel to respond more robustly. A failure to respond decisively could set a dangerous precedent, misaligning with Israel’s traditional stance as vocalized by Prime Minister Netanyahu’s stern warning that any attack on Israel will result in retaliation.

The geopolitical landscape could prompt a reassessment of risks associated with oil production, especially regarding countries under sanctions like Iran. If the market starts to factor in a higher likelihood of a supply decrease from Iran, it could trigger an increase in the geopolitical risk premium.

Currently, Iran’s crude oil production has seen an uptick of roughly 0.6mb/d, which is more than a 20% increase over the last two years. Any indication of a potential supply reduction could escalate market risks.

Amidst these uncertainties, core OPEC+ producers are crucial players. Saudi Arabia’s foreign ministry has already issued a statement urging restraint and the avoidance of further military conflict, reflecting a desire for stability.

From a production standpoint, our baseline forecast—which doesn’t factor in additional supply disruptions—anticipates that OPEC+ will incrementally increase oil production in the third quarter, given the existing spare capacity. The recent increase in time spreads and speculative positions makes a production increase by Saudi Arabia and the other seven core OPEC+ producers more likely. Such a probability is bolstered by the cut announced last year and could be further amplified by supply disruptions in other regions, such as Iran.

Lastly, oil producers’ financial hedging tactics could mitigate the impact of heightened geopolitical risks. By proactively managing price risks and selling forward their production, oil producers can cushion the blow of any price fluctuations that arise from the current geopolitical tensions.

The evolving geopolitical scenario in the Middle East holds substantial sway over the oil markets. The industry is closely watching Israel’s next move, the broader international diplomatic efforts, and OPEC+’s production decisions, all of which are pivotal in shaping the future of global oil supply and prices. As we navigate through these turbulent times, market stability hinges on the strategic interplay of diplomacy, production policies, and financial prudence.