Israel’s allies are pushing for a diplomatic response to Iran’s attack, although it would appear that Israel is looking at a potentially more aggressive approach.
The US and Europe are looking at potentially imposing stricter sanctions against Iran following the attack. The US already has oil sanctions in place against Iran.
The issue is that the US has not strongly enforced these sanctions since Russia’s invasion of Ukraine, given concerns over oil supply and higher prices. As a result, Iranian oil supply has grown from an average of a little over 2.5m b/d in 2022 to close to 3.2m b/d in March 2024. If the US was to properly enforce sanctions, it would leave around 700k b/d of supply at risk.
There is potential for further supply losses due to sanctions. Legislators in the US are considering a bill called the Iran-China Energy Sanctions Act, which would attempt to crack down on Iranian oil flows to China. There is also scope for the EU and other allies to agree on multilateral sanctions, which would only make it more difficult to move Iranian oil.
While new sanctions might be introduced, the key question is whether these sanctions will be more strictly enforced. There will be concerns over the potential impact supply losses could have on oil prices, and the Biden administration would not want to see higher oil prices and pump prices in the lead-up to US elections later in the year.
If we were to see stricter enforcement of sanctions, this is not something that will become immediately apparent to the oil market. It will take time for it to become noticeable in tanker tracking data.
Losing in the region of 700k b/d of Iranian oil supply would be enough to push the oil market into small deficit over the second half of the year, which would imply ICE Brent averaging US$92/bbl in 4Q24 versus our current forecast of US$85/bbl for the final quarter of the year. This is under the assumption that OPEC+ decides against rolling over supply cuts into the second half of the year.
