It’s also the case, however, that global oil supply is greater than oil demand and there is a lot of unused capacity within the global industry that could be brought back if Iran’s production were severely disrupted.

Last month, a meeting of the OPEC+ oil cartel deferred planned production increases in October until December because of the weakness of demand.

The cartel, which has cut its production by almost 6 million barrels a day since it started trying to put a floor under the oil price in 2021, had planned to bring back 2.2 million barrels a day, starting this month, by adding 180,000 barrels a day each month until November next year.

With demand ebbing, mainly from China (Iran’s biggest customer) as its economy has slowed and its transport sector has become increasingly electrified, OPEC+ has consistently over-estimated demand growth over recent years.

Its efforts to push prices up – the Saudis, who have borne the brunt of the production cuts, are thought to need a price of $US85 a barrel or more to balance their budget – have been undermined to a degree by some of its members producing above the quotas they agreed to.

Iraq, Kazakhstan and Russia have been among the offenders, although a meeting of OPEC+’s Joint Ministerial Monitoring Committee this week concluded that they had reached “full conformity” last month and had committed to revised plans to compensate for past over-production by producing less than their quotas.

With so much spare capacity sitting on the sidelines and the Saudis apparently giving up on trying to use constrained supply to force prices up, OPEC+ could easily (and probably eagerly) replace any lost Iranian supply – unless the Strait of Hormuz were effectively closed by Iran.

Iran exports about 1.8 million barrels a day of the 3 million or so barrels a day that it produces. The Saudis alone have spare capacity of about 3 million barrels a day.

Outside OPEC and its associates, the US, Canada, Guyana and Brazil have been increasing their production – the US has been producing at near-record levels of about 13.2 million barrels a day – which has pushed the OPEC+ global market share down steadily, to its current 48 per cent.

Thus, while there might some short-term effects if an Israeli response to the missile attacks impacts Iranian supply, with global demand growth continuing to slow, plenty of sidelines OPEC+ supply available and non-OPEC production growing, the likelihood of another “oil shock” appears low.

In fact, absent a dramatic development in the Middle Eastern confrontations, the question mark over the oil market is more likely to be how low prices might go than how high.

OPEC has denied a Wall Street Journal report that said the Saudi oil minister had threatened that prices could go as low as $US50 a barrel if the “cheaters” within the cartel – those countries producing above their quotas – don’t stick to their agreed production limits.

While OPEC described the Journal’s reporting as “wholly inaccurate and misleading,” there’s no doubt that the Saudis, having overwhelmingly borne the brunt of production cuts, have lost patience with the cheaters.

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It would be no surprise, if non-compliance with the commitments were to continue, if the Saudis flooded the market and drove prices down. They’ve done it before, most recently in 2020 when Russia wouldn’t agree to the first bout of production cuts. The oil price fell below $US30 a barrel.

OPEC has stuck with its forecast of demand growth of just over 2 million barrels a day this year, which has looked increasingly unrealistic as China’s demand has fallen away, and growth of 1.74 million barrels a day next year. The International Energy Agency’s forecast of growth of 903,000 barrels a day and 970,000 barrels a day next year looks more realistic.

With non-OPEC+ production continuing to rise and the gradual restoration of more than 2 million barrels a day of the cartel’s output through next year, the likelihood is that the volume of supply will swamp demand, forcing oil prices to be significantly lower.

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