Oil Market on Edge Waiting for What Iran Will Do

The oil market looks relaxed, but it is still on edge waiting for what Iran will do.

That’s what Bjarne Schieldrop, Chief Commodities Analyst at Skandinaviska Enskilda Banken AB (SEB), said in an oil report sent to Rigzone by the SEB team on Monday. In the report, Schieldrop highlighted that Brent crossed the $80 per barrel line this morning but noted that it “quickly fell back, assigning limited probability for Iran choosing to close the Strait of Hormuz”.

“Brent traded in a range of $70.56-$79.04 per barrel last week as the market fluctuated between ‘Iran wants a deal’ and ‘U.S. is about to attack Iran’. At the end of the week though, Donald Trump managed to convince markets (and probably also Iran) that he would make a decision within two weeks. i.e. no imminent attack,” Schieldrop said in the report.

“Previously when he has talked about ‘making a decision within two weeks’ he has often ended up doing nothing in the end. The oil market relaxed as a result and the week ended at $77.01 per barrel which is just $6 per barrel above the year to date average of $71 per barrel,” he added.

“Brent jumped to $81.4 per barrel this morning, the highest since mid-January, but then quickly fell back to a current price of $78.2 per barrel which is only up 1.5 percent versus the close on Friday,” he continued.

“As such the market is pricing a fairly low probability that Iran will actually close the Strait of Hormuz. Probably because it will hurt Iranian oil exports as well as the global oil market,” he went on to state.

Schieldrop highlighted in the report that the U.S. attacked Iran on Saturday, noting that the attack involved 125 warplanes, submarines, and surface warships, and that 14 bunker buster bombs were dropped on Iranian nuclear sites including Fordow, Natanz, and Isfahan.

“In response the Iranian Parliament voted in support of closing the Strait of Hormuz where some 17 million barrels of crude and products is transported to the global market every day plus significant volumes of LNG,” Schieldrop pointed out in the report.

“This is however merely an advice to the Supreme leader Ayatollah Ali Khamenei and the Supreme National Security Council which sits with the final and actual decision,” he added.

Schieldrop noted in the report that, so far, not a single drop of oil supply has been lost to the global market.

“The price at the moment is all about the assessed risk of loss of supply,” he said in the report.

“Will Iran choose to choke of the Strait of Hormuz or not? That is the big question. It would be painful for U.S. consumers, for Donald Trump’s voter base, for the global economy, but also for Iran and its population which relies on oil exports and income from selling oil out of that Strait as well,” he added.

“As such, it is not a no-brainer choice for Iran to close the Strait for oil exports. And looking at the oil price this morning it is clear that the oil market doesn’t assign a very high probability of it happening,” he stated.

“It is however probably well within the capability of Iran to close the Strait off with rockets, mines, air-drones, and possibly sea-drones,” Schieldrop continued.

The SEB Chief Commodities Analyst stated in the report that the oil market reaction to this weekend’s events is very muted so far, adding that the market is still on edge awaiting what Iran will do.

“Iran will do something. But what and when? An oil price of 80-something seems like a sensible level until something does happen,” he added.

In a report sent to Rigzone by the SEB team on Sunday, Ole R. Hvalbye, Commodities Analyst at SEB, said “the key risk for global markets now centers on Middle East oil flows, particularly through the Strait of Hormuz”.

“Any closure – or spill over into other regional producers – would significantly lift oil prices. That said, given China’s heavy reliance on Gulf crude, we still view this scenario as a tail risk rather than a base case,” he added.

In a note sent to Rigzone by the Sparta Commodities team on Monday, Neil Crosby, Oil Analytics AVP at Sparta, said a full Strait closure is unlikely but warned that “many scenarios lie in between that and full access”.

“The Iran-Israel conflict has escalated dramatically with direct U.S. involvement,” Crosby stated in the note.

“Hormuz closure is an option but Western intervention would be swift. Nonetheless, partial closures or naval escorts through the Strait could still result in large delays getting oil out the region. Two U.S. Carrier Strike Groups are now in nearby waters,” he added.

“Protracted attacks through drones, GPS interference, cyberattacks, and sea mining are possibilities. Reports are emerging of tankers turning away from the Strait in recent hours,” he continued.

“Warfare is non-linear, and any small action could eventually prove to be a flashpoint. In our opinion, maintaining some exposure to the long side of volatility, even at high premiums, continues to be a wise strategy in these times,” Crosby went on to state.

In a commodities note sent to Rigzone by the Saxo Bank team on Friday, Ole S. Hansen, the head of commodity strategy at Saxo Bank A/S, said, “in the coming days, the market will remain laser-focused on developments in and around the Strait of Hormuz”.

“In the event of a short-lived disruption, however unlikely, prices could spike sharply towards $100,” he added.

Rigzone has contacted the White House and the Iranian Ministry of Foreign Affairs for comment on Schieldrop, Hvalbye, Crosby, and Hansen’s statements. Rigzone has also contacted Israel’s Ministry of Foreign Affairs Spokesperson, Oren Marmorstein, for comment on Crosby’s statement. At the time of writing, none of the above have responded to Rigzone.

To contact the author, email andreas.exarheas@rigzone.com