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Goldman Sachs predicts a $20 per barrel oil price increase if Iran's oil supply drops due to conflict.

OPEC+ spare capacity could offset some of the supply loss, potentially limiting the price rise.

A more significant disruption in the Middle East could lead to much higher oil prices.
oil prices

International crude oil prices could surge by $20 per barrel if Iran’s oil supply drops in a possible escalation of the Middle East conflict, Goldman Sachs says.

“If you were to see a sustained 1 million barrels per day drop in Iranian production, then you would see a peak boost to oil prices next year of around $20 per barrel,” Daan Struyven, co-head of global commodities research at Goldman Sachs, told CNBC’s “Squawk Box Asia” on Friday.

However, this projection is based on the assumption that the OPEC+ group would not respond to a potential disruption to supply from Iran by boosting production, Goldman’s Struyven noted.

If major OPEC+ producers with enough spare production capacity, such as Saudi Arabia and the United Arab Emirates (UAE), increase output and offset some of the potential losses from Iran, oil prices could rise more modestly, and the impact could be slightly less than $10 barrel, Goldman’s analyst added.

Most analysts say that the OPEC spare capacity, concentrated in Saudi Arabia and the UAE, would be enough to compensate for an Iranian loss of supply.

“In theory, if we lost all Iranian production - which is not our base case - OPEC+ has enough spare capacity to make up for the shock,” Amrita Sen, co-founder of Energy Aspects, told Reuters this week.

According to analysts, Saudi Arabia could be able to increase its oil production by about 3 million bpd and the UAE by 1.4 million bpd.

Iran currently produces around 3.5 million bpd, of which an estimated 1 million bpd are exported, mostly in China, which hasn’t stopped buying Iranian oil after the U.S. re-imposed sanctions on Tehran’s oil industry.

An even more significant disruption to supply from the Middle East could lead to triple-digit oil prices. But analysts currently believe attacks on oil infrastructure in other producers in the region or the closure of the Strait of Hormuz are low-probability events.

Early on Friday in European trade, Brent and WTI prices were up by about 1% as the markets expected the Israeli response to Iran’s missile attack on Israel earlier this week. Oil prices were on track for a strong weekly gain amid the escalation of the conflict.

By Tsvetana Paraskova for Oilprice.com

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