The oil futures paper market is likely underestimating the massive supply disruption that a closed Strait of Hormuz is creating in physical crude and fuel supply globally.
Crude futures prices briefly spiked early this week to $119 per barrel, before retreating to the $90s and trading at $100 a barrel early on Friday in Asian trade.
However, the premium of physical Dubai crude has surged to $38 per barrel over its paper equivalent, according to data compiled by Reuters columnist Clyde Russell.
The wide gap between paper and physical prices suggests that supply is being immediately choked off.
But traders on the paper market appear to believe that the record-high emergency stocks release and the U.S. Administration’s scrambling to calm the markets with comments that the war will end soon would ease the upward pressure on oil prices.
Analysts started expressing views that $200 oil is not a fantasy anymore—with 20% of global oil supply choked at the Strait of Hormuz buyers are racing to procure physical cargoes, refiners in Asia consider cutting processing rates, and Asian countries restrict fuel exports.
As a result, jet and diesel cracks soared to never-seen highs, leaving entire regions such as Europe in a shocking shortfall of middle distillates.
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Hours after announcing the biggest-ever coordinated emergency release of oil stocks, of 400 million barrels, from reserves, the International Energy Agency warned that the Middle East war is creating the biggest supply disruption in the history of the oil market.
The IEA-coordinated release will take weeks and possibly months to reach the market. The U.S. release of stocks as part of the IEA action will take about 120 days to complete, ING’s commodities strategists Warren Patterson and Ewa Manthey said.
“If you assume a similar timeline for other countries, that works out to 3.3m b/d – far short of the supply losses we are seeing from the Persian Gulf,” they noted.
With limited capacity available to bypass the crucial Strait of Hormuz and storage filling up, Gulf producers have slashed their combined oil output by at least 10 million barrels per day, the IEA said in its monthly Oil Market Report on Thursday.
In addition, over 3 million barrels per day of refining capacity in the Gulf region has already shut due to attacks and a lack of viable export outlets.
“Runs elsewhere will be increasingly limited due to feedstock availability,” the IEA warned.
The coordinated stocks release, while a record-high since the agency was created in the 1970s, wouldn’t go far to help supply in most of developing Asia, where neither China nor India, the top crude importers, are IEA members. China has some buffer to withstand part of the supply shock, but Indian stockpiles are among the lowest in the region.
The U.S. Treasury moved to allow, until April 11, purchases of Russian crude stuck in tankers in floating storage. China and India will likely compete fiercely for this supply. And still, it will not come close to offsetting the massive loss of Middle Eastern supply, most of which goes to Asia.
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“Asia’s alternative crude supply sources are severely limited, with both China and India competing for Russian crude,” said Sushant Gupta, Research Director, Asia Pacific Refining and Oils at Wood Mackenzie.
“Asian refiners will struggle to fulfil crude buying requirements for April, leading to run cuts across the region. Refiners will be dipping into their buffer stocks, which is typically up to 15 days of their needs,” Gupta added.
“Eventually, most countries will need to fall back on strategic petroleum reserves if the conflict continues.”
The conflict doesn’t look to be ending soon, despite the Trump Administration’s efforts to convince the market of the contrary and play down the spike in oil and gasoline prices.
Early this week, analysts at Wood Mackenzie said that Brent Crude prices could surge to $150 per barrel in the coming weeks.
“However, supply volumes at risk this time are dimensionally bigger – and real,” unlike in the 2022 Russian invasion of Ukraine, when supply was free flowing and just had to redirect to China and India, according to WoodMac.
“In our view, US$200/bbl is not outside the realms of possibility in 2026,” the analysts said.
The Trump Administration is scrambling to contain the fallout on prices. Energy Secretary Chris Wright on Thursday told CNN that oil prices are unlikely to hit $200 per barrel, “but we are focused on the military operation and solving a problem.”
At the same time, Wright told CNBC that the U.S. Navy is not ready to begin escorting oil tankers through the Strait of Hormuz.
While the paper market reacts to comments and attempts at assurances, the physical crude market is flashing signs of stress and distress as a large portion of global oil supply is now off the market for weeks, possibly months.
By Tsvetana Paraskova for Oilprice.com
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