Oil Price Shock Could Worsen If U.S. Seizes Iran’s Strategic Oil Island

Geopolitical Risks to Oil Supply

A new analysis from JP Morgan indicates that global oil markets could face a significant shock if the United States or Israel were to take control of Iran's Kharg Island. The report suggests that such a move could drastically reduce Iran's oil output, potentially cutting it by as much as 50%, and severely curtail its export capabilities. This scenario would further intensify the existing pressures on global oil supply, already strained by various geopolitical factors.

Kharg Island, situated in the Persian Gulf, serves as the central hub for Iran's oil infrastructure. It is responsible for processing approximately 90% of the nation's crude oil exports. The island receives crude via pipelines from key Iranian oilfields, including Marun, Ahvaz, and Gachsaran.

Market Impact and Recent Price Surge

The potential disruption to Iranian oil exports is occurring against a backdrop of already elevated oil prices. Brent crude futures for April delivery recently climbed 5.7% to trade near $98.13 per barrel. Simultaneously, the WTI crude contract experienced a 4.84% increase, reaching approximately $95.30 per barrel. These price levels are reminiscent of those seen during the height of the pandemic, reflecting the market's sensitivity to supply concerns.

A direct strike would immediately halt the bulk of Iran’s crude exports, likely triggering severe retaliation in the Strait of Hormuz or against regional energy infrastructure.

Historical Context and Current Export Levels

While the possibility of military action against Kharg Island is unprecedented, the island has been a strategic asset for decades. Even during the Iran-Iraq War, despite some damage, Kharg Island remained largely operational, highlighting its resilience and importance to Iran's oil exports.

JP Morgan's analysis, citing Arab media reports, indicates that Iran has recently increased exports from Kharg Island to nearly record levels, exceeding 3 million barrels per day (bpd). This is almost triple the normal rate of 1.3 million to 1.6 million bpd. Data from Kpler suggests that the island's storage capacity is around 30 million barrels, with current storage levels at approximately 18 million barrels, sufficient for only 10-12 days of exports under normal conditions. A sudden disruption could therefore have an immediate and significant impact on global oil availability.