Oil and refining market implications of Israel’s strike on Iran

What happened?

In the early hours of 13^th June, Israel launched a large-scale attack on Iran that targeted its nuclear programme and military leaders. The recent attack follows last year’s attacks by Israel and Iran, openly carried out after a years-long shadow war.

Iran’s main nuclear sites, including Natanz, ballistic missile sites as well as residences and command centres of senior military personnel and nuclear scientists were hit. High profile casualties include IRGC Chief Hossein Salami alongside several other commanders and nuclear scientists.

Following the attack oil prices jumped by over 10% in early trading but prices moderated at around US$74/bbl later in the day. There was no immediate disruption to oil fundamentals as no energy infrastructure was damaged. Iran currently produces about 3.3 million b/d and exports about 1.5 million b/d of crude oil. However, several nations have instructed vessels to divert away from the Arabian Gulf.

What led up to the event?

Tensions in the Middle East had been at close to boiling point as US-Iran nuclear talks were reported to be stalling. Earlier this week, the US announced it would be removing some personnel from the Middle East region in a sign of growing regional tension. Additionally, on 12 June, the IAEA formally declared Iran non-compliant with nuclear non-proliferation obligations for the first time in two decades.

Key signposts to watch

The current situation is highly uncertain, with history suggesting several factors need to be carefully watched. These can be consolidated into:

• Does Iran retaliate further? Already it has sent over 500 drones at Israel. Additional measures will be difficult given Iran’s military capabilities have been diminished over the last year by prior Israeli attacks. Does it conduct further symbolic responses, which were well signalled previously and so easily countered by prepared defence systems?
• When might Iran retaliate again? An immediate response beyond the drones sent earlier today seems unlikely as that could only bring on further strikes from the air-dominant Israelis. How long can Iran wait, as this determines the duration of any tensions?
• What is the role of Iran’s proxies? With Hamas virtually eradicated, Hezbollah severely diminished and the Houthis surrounded by Western navies, any response is likely to be Iranian, which risks triggering severe consequences for the Iranian regime.
• What happens to the US-Iran nuclear deal discussions that were scheduled for Sunday 15 June? Will Iran accept the US deal on offer to avoid further damage or accuse the US of being effectively complicit in the Israeli response and so become further isolated beyond its relations with Russia and China?
• Notably, the UAE and Saudi Arabia both condemned the attacks quickly after they occurred. Both have taken steps to improve relations with Iran over the past few years. The goal is to avoid being drawn into an escalation in the conflict. Gulf producers are expected to take steps to ensure security of supply to the global economy, to the degree possible.

Market outlook

Given the scale of the Israeli attacks and the Israeli air dominance, an immediate large-scale response from Iran is unlikely. Oil prices could lose some of the current risk premium over the summer. Before the attack on 13 June, Brent had traded upward moving to $68-$69/bbl from the low $60s, and is now trading at $74-$75/bbl, pointing toward a premium of $5 to $7/bbl.

The market is pricing in an Iranian response which has already started with a moderate drone attack on Israel that was thwarted. Assuming Iran waits to respond we would expect some of the risk premium to ease in the next several weeks as OPEC+ barrels come back into the market. The OPEC+ producers are currently easing the 2.2 million b/d voluntary cut. On that basis, we expect an oversupplied market in Q4 2025 after a tight summer. We project global refining runs to increase from May to June and July, adding support to oil prices in Q3.

On the assumption that Iranian retaliation is symbolic, we project the price of Brent to weaken from current levels. Given the uncertainty, Brent is unlikely to fall back to the previous recent lows of $60 to $65/bbl. Even before the attack on 13 June, the price of Brent was strengthening with some of that – about $2/bbl - due to rising expectations of an Israeli attack. The risk premium on 13 June of $5 to $7/bbl is likely to ease to $3 to $5/bbl. The month of July could see an average of around $70 to $71/bbl for Dated Brent.

The key current risk in the market is if Iran decides to conduct an attack on shipping in the Gulf or Strait of Hormuz, disrupting exports from the region responsible for almost 20% of global supply. But this would be a sharp escalation that further isolates Iran and hurts its improved relations with Saudi Arabia. If it were to occur, the impact on prices would be severe with Brent moving toward $90 to $100/bbl. Prices would need to move high enough to throttle demand given the share of global supply that moves through the Straits. The US has indicated such an act would trigger a US response and thus this next step would be unlikely.