Ominous signs are all around. Clouds are gathering on the horizon and a storm seems brewing. Stakes are up. Crude markets are starting to react firmly to the developments. It is no more just an issue of supply and demand. Extra market forces are once again very much in operation.

The ongoing Iran-US tussle is matter of great concern for the energy markets. In a situation, where virtually every once concedes, that the supply-demand balance is at best precarious, the ominous development is an additional burden on the markets.

After Saudi Arabia, Iran is the second largest oil exporter in the world. With a production capacity of around four million barrels a day and an export of around 2.5 million barrels a day, Tehran fills up a very significant part of this balanced equation today. God forbid, if things turn to worst, it could be mayhem in the market. Not much spare capacity is available all around. While OPEC has been producing almost at its peak, for some time now, the markets are just balanced. There is very little spare capacity to be found elsewhere. Saudi Arabia is perhaps the only real exception as far as spare capacity is concerned. According to estimates and projections, Riyadh is an exception and not the norm in this case. It is still committed to maintaining a spare capacity of at least 1.5 million barrels a day - indeed at considerable cost to the Saudi exchequer.

But even this spare capacity is not sufficient to meet the gap that could arise in case Tehran is unable to produce and export. Indeed Tehran has vowed not to stop supplies even in case of hostilities, as some say that Tehran would not like to cut its financial life line by stopping the exports of its major exportable product — crude oil. Yet in case of another round of hostilities breaking out in the region once again, to what extent Iran and other regional producers could continue producing at normal rates is at best debatable at this stage.

Then the quality of crude available as spare currently to replace any Tehran outage is also another point to consider. Last year, when the OPEC had on table some 2 million barrels a day of crude, there were not many takers to it. Apart from markets reasons, one of the causes put forward by the market was the fact that the crude on offer was the heavy type, which the refiners avoid until they have no other option. The spare capacity that could now be made available to replace the Iranian outage, in case that happens, would mostly be of the heavier type. And indeed there are not many takers for this type of crude at this stage.

However, apart form the above simple mathematics, another factor is now coming into play. The entire last week, Iran has been conducting ware games — apparently with a specific aim. During the war games Iran test fired a new land — to — sea missile as well as a rocket torpedo. According to some Iran could resort to other choices to impede the flow of crude through the Straits, including sinking some of its own ships to block sailing or mounting “swarms” of small missile boats. Some two-fifth of the global oil trade — roughly around twenty million barrels a day pass through the narrow Straits and any problem en-route could bring catastrophe on the region and indeed on the globe. The Straits of Hormuz, between the Gulf and the Sea of Oman, is a strategic corridor for the oil exports.