Brent crude and WTI are once again above $100 and likely to stay there longer than those involved in the planning of the latest war in the Middle East may have expected. With that, energy-thirsty economies are beginning to feel the pinch, and not everyone is optimistic that it will be a short pinch.
Brent crude, the global benchmark, surged past $116 per barrel earlier today, with West Texas Intermediate also reaching that level in a rare parity between the two. Murban crude, meanwhile, has hit $120 and sped past it, reflecting the continued freeze of most tanker traffic in the Strait of Hormuz. Israel-based maritime intelligence firm Windward reports that crossings of the chokepoint remained significantly below the average over the weekend, with a total of three for Saturday, compared to a seven-day average of 13.43—and a pre-war average of 100. Media are reporting that Iran is widening its target environment—and the country just got its new supreme leader, who is described as a hardliner.
None of this bodes well for global energy security. Aware of that fact, the Trump administration has tried to calm things down by promising federal insurance for tankers in the Strait and a navy escort for vessels. Both of these have yet to materialize, with reports suggesting shipowners were unsure how the federal insurance would work.
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Meanwhile, the Navy escort idea would be challenging to put into practice due to the sheer number of tankers currently stuck around the Strait of Hormuz. “There’s hundreds and hundreds of vessels still in the Mideast Gulf,” Matt Wright, a senior freight analyst at Kpler, told CNBC last week. The U.S. Navy would need “an inordinate amount of time to escort them even a few at a time.”
In a further sign that the supply squeeze could last for a while yet, the U.S. administration lifted some sanctions on Russian crude, with U.S. ambassador to the UN Tim Waltz saying that “It’s a 30-day pause to allow, which is just kind of common sense, to allow the millions and millions of barrels of oil that are sitting out on ships to go to Indian refineries.”
These millions of barrels sitting on ships, by the way, were just a month ago considered a supply overhang by analysts who kept their oil price forecasts bearish due to that supply overhang. How fast things could change in the world of oil when there’s a war near a supply hub could—and should—be a teachable moment.
Energy Secretary Wright tried to instill a sense of optimism among consumers by essentially pointing out that with no pain, there would be no gain. “If this is brief in duration, it’s a small dislocation,” Wright told the Wall Street Journal last week in an interview. “It’s a small amount of short-term pain for enormous long-term gain for peace and stability and investment in the Middle East.” Wright noted that the war comes “with U.S. oil production at all-time highs, a world well-supplied in oil, [and] new increases in production coming out of Venezuela.” The official noted that currently people are reacting emotionally to the situation because of uncertainty how things will go, but in the end “rationality wins out” on oil markets.
It appears that the big surprise for both analysts and traders was the scale of Iran’s counter-attacks after the United States and Israel first struck it—and the speed of those counter-attacks. This suggests that the majority of professional observers were biased in favor of a best-case scenario and quite dismissive of the worst-case scenario that is currently unfolding—hence the emotional reaction Secretary Wright spoke about.
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Besides the emotional reaction, however, the hard fact remains that a lot of oil is stuck in the Persian Gulf and the more time passes, the less supply there will be as producers begin to wind down output for lack of enough storage capacity. Even if all sanctions on Russian oil are lifted—and the EU is unlikely to agree to that easily—this won’t be enough. Even if Venezuelan crude production doubles, it would still not be enough, because the Strait of Hormuz handles 14 million barrels of crude oil daily, according to Kpler data cited today by Reuters columnist Clyde Russell.
Those 14 million barrels daily are pretty much gone at the moment. Windward reports that only one of the three vessels that passed the Strait on Saturday was a tanker. While this is temporary, no one seems to know just how long “temporary” means in the context of this latest war. This uncertainty, coupled with the steps being taken by Middle Eastern producers to reduce supply, is bound to cause even more pain to economies around the world—except China. China has amassed oil reserves of about a billion barrels, per Russell.
By Irina Slav for Oilprice.com
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