Oil prices slide as Iran retaliation spares energy assets. Here’s what you need to know

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Israeli and U.S. attacks on Iranian cities and nuclear facilities this month have put energy markets on edge, as traders assess the risk that oil exports from a key Middle Eastern producer could be disrupted. On Monday, prices tumbled to pre-attack levels as that concern eased.

U.S. oil prices had jumped since June 12, the day before Israel launched its first strikes in Iran. The U.S. entered the war late Saturday when its military bombed three nuclear sites.

But it appeared Monday that Iran may not retaliate by targeting energy exports, especially its own, that flow through the Strait of Hormuz. While Iran launched a retaliatory missile attack on a U.S. military base in Qatar, it did not target oil facilities.

Later on Monday, U.S. President Donald Trump announced in a social media post that Israel and Iran had reached a ceasefire agreement, though neither country immediately confirmed that a deal was in place.

Up to 20 million barrels of oil and petroleum products a day pass through the Strait of Hormuz, equal to about a fifth of world demand, and the strait is crucial to Iranian revenue.

West Texas Intermediate oil was down 7 per cent on Monday, at US$68.76 a barrel.

What’s driving oil prices?

“Ultimately, our take is that mutually assured economic destruction doesn’t appear likely,” Daniel Ghali, director, commodities strategy for TD Securities, said Monday before Mr. Trump’s announcement.

Mr. Ghali listed several reasons that the medium- and long-term effects on the global oil market could be muted. For one, Iran and other producers in the region are major exporters to China. It relies on crude sailing through the Strait of Hormuz for half its seaborne oil imports. Other Asian economies are also major customers.

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In addition, Israel’s attacks on Iranian energy infrastructure have been concentrated on domestic sites and have not disabled export facilities, notably the country’s main export terminal at Kharg Island.

“It seems as though the decision has been made to strategically maximize the impact on Iran’s domestic energy consumption and minimize the impact to Iran’s energy exports,” he said. “In fact, as a result of these strikes, Iran is actually exporting more barrels to the world.”

Oil price spikes have historically subsided about one month after hostilities in the region, he noted.

If the strait was to be blocked, the reaction would be even more pronounced than during Russia’s invasion of Ukraine in 2022, said Janiv Shah, vice-president of oil markets analysis with Rystad Energy.

With nearly a third of global seaborne crude exports flowing through the Strait, a closure has the potential to affect both the quality and the volume of oil flowing to world markets, Mr. Shah said.

“Iran’s been depleted heavily, it’s been defanged by Israel for a good number of years,” he said, so there’s a chance the country’s response may not be as fierce as it could have been a few months or years ago.

“But most of the market wouldn’t want any impact on the strait, because 18 to 19 million barrels of crude and products flow through there, especially at this time of year when demand season is peaking up.”

Why is the Strait of Hormuz so important?

The narrow waterway is located between Oman and Iran, connecting the Persian Gulf with the Gulf of Oman and the Arabian Sea. It is deep and wide enough that the largest oil tankers can sail through. There are limited alternatives for oil from the region to be exported if the strait closes, the U.S. Energy Information Administration, or EIA, says.

Iran exports about 1.4 million barrels a day. But it is Saudi Arabia, not Iran, that moves the most through the strait. The dominant OPEC producer exported 5.5 million barrels a day through the waterway last year, representing 38 per cent of the shipments.

Meanwhile, the strait is also key from a demand perspective. Nearly 85 per cent of the oil and condensate and 83 per cent of liquefied natural gas that flowed through the Strait of Hormuz went to Asian markets in 2024, the EIA estimates. The top customers are China, India, South Korea and Japan.

Mr. Ghali pointed out that there has never been a disruption of tanker traffic through the strait in response to military hostilities: “We have not learned any information with respect to how this conflict is going to evolve. What we have learned is there seems to be a strategic decision to minimize the impact on energy markets.”

How is Canadian energy affected?

The main effect on Canadian producers has been a boost to global oil prices owing to a risk premium, said Kevin Birn, S&P Global’s chief analyst for Canadian oil markets.

That premium had oil prices up about 20 per cent since the beginning of June, Mr. Birn said, even though the market is still well-supplied with no physical disruptions. However, prices are still below where they were a year ago.

The question now is whether the conflict escalates. “Will it broaden out? That has bigger implications for the oil market.”

Developments in the coming days and weeks could also change the destination for Canadian crude, given the flexibility of water-borne cargos.

Canada is constrained off the West Coast – the expanded Trans Mountain pipeline system can only transport so much – but there is the potential to move more crude offshore through the U.S. Gulf Coast, Mr. Birn said.

Mr. Shah, with Rystad, expects little change to Canadian production plans. But he’s watching where barrels end up. If Iran closes the Strait of Hormuz, leading to a shortage of oil from the Middle East, it could increase China’s appetite for oil from other markets, including Canada.

Canadian oil companies shares fell with crude prices on Monday. The S&P/TSX Capped Energy Index fell more than 3 per cent, with Suncor Energy Inc., Cenovus Energy Inc. and Canadian Natural Resources Ltd. all down sharply.