Trump’s Tanker Escort Plan Calms the Market but Questions Remain
After spiking higher at the start of the week, today’s early price action is relatively subdued after President Trump suggested the U.S. Navy could help to get oil out of the area by escorting tankers through the Strait of Hormuz. Keeping open the Strait is critical because about 20% of global production flows through it. Supply to Europe, for example, could come to a halt if the waterway is blocked.
Backing and Filling Suggests Traders Still Expect a Short War
While traders are primarily focused on the possibility of a major supply disruption, which is the main driver of the current uptrend, they are also looking for clear signs of de-escalation, which could reverse the trend. I’ve seen a lot of backing and filling this week on the daily chart, which suggests traders still believe that the war will be short like Trump said. However, I don’t think he took into consideration the widening of the war theater by Iran with its bombing of oil infrastructure in neighboring countries.
Insurance Risk Could Limit Oil Flows Even If the Strait Stays Open
Keeping open the Strait of Hormuz is one goal that needs to be accomplished to keep a lid on prices. However, if production facilities are damaged and repairs take months, oil prices will remain elevated and this will be inflationary and could have a major impact on the global economy. We’re already seeing it in the United States with a big jump in gasoline prices at the pump.
Even if the Strait is kept open, there’s still the question of whether oil company tankers can obtain insurance for their cargo. So it’s not a given that even if the U.S. Navy plans to protect ships going through the Strait that there will actually be any oil available to move through the area.
Iranian Energy Infrastructure Hit as Iraq Cuts Production
Oil could become scarce because of a lack of production or a slowdown. Reuters is reporting that U.S. forces struck Iranian energy infrastructure in a region that produces a little under a third of global production. At the same time, Iraq has cut about half of its production and could cut even more if exports don’t resume quickly.
API Shows Surprise Build Ahead of EIA Report
In other supply related news, the American Petroleum Institute (API) reported that inventories rose by 5.6 million barrels last week. This exceeded the 2.3 million barrel forecast. Later today, the U.S. Energy Information Administration (EIA) will release its inventories report that is expected to show a 3.0 million barrel build.
