Crude Prices Surge Amid U.S.-Iran Tensions
Escalating hostilities in the Middle East are sparking concerns over dwindling global oil supplies, pushing crude prices back up to levels seen before the U.S. and Iran signed a ceasefire agreement in mid-June.
Both countries intensified attacks for an eighth consecutive day Sunday, resulting in casualties and reigniting fears of outright war.
The renewed conflict has led to an unravelling of the memorandum of understanding between the two countries that was intended to lead to a lasting peace agreement. In addition, Iran has again closed the Strait of Hormuz – the world’s most important oil shipping route.
Brent, the international crude-oil benchmark, has surged more than 10 per cent over the past week as the hostilities have led to a reversal in the recovery of the volume of oil flowing from the Gulf region. Traders are weighing the risks that global crude and product stocks – which stabilized energy markets when the conflict began – are reaching new lows.
West Texas Intermediate, the U.S. benchmark, settled at US$82 a barrel on Friday, having dipped below US$70 earlier this month, while Brent closed at US$88 a barrel.
Goldman Sachs estimates that Gulf oil exports recovered to more than 80 per cent of prewar levels in the first two weeks after the memorandum of understanding was signed but those flows have halted since the recent fighting resumed.
Vessel crossings in the strait hit a three-week low late last week as attacks on ships intensified and the U.S. reimposed its naval blockade. Crossings fell to eight on Thursday, according to Kpler data, a maritime-intelligence firm.
Prices for gasoline and diesel also turned sharply higher last week, resuming the price pressure faced by consumers and the global trucking industry.
“Crude and product stocks have drawn significantly. We expect them to continue to draw into the fourth quarter of this year, which could warrant higher-for-longer oil prices.” said Kyle Bertamini, an analyst at Enverus, an energy software company.
Mr. Bertamini said markets are currently underpricing the tightness in global supply, a view he shares with other experts who are growing increasingly concerned about the depleting government stocks of crude oil. Emergency stocks have been strategically released over the past few months to stabilize prices and make up for the loss of Gulf supply – or about one fifth of the world’s oil.
In early March, 32 member countries of the International Energy Agency agreed to release 400 million barrels of oil from their emergency reserves to address the disruptions. Recently, the IEA said that its member countries had released almost three-quarters of the planned amount.
Prior to the conflict, the U.S. strategic petroleum reserve – the world’s largest publicly known emergency stockpile of oil – had about 415 million barrels of oil stored, more than half its capacity.
But the recent conflict has pushed reserves to their lowest levels since 1983. In March, President Donald Trump announced that the country would draw 172 million barrels to combat the world’s largest oil-supply disruption on record and stabilize oil markets.
About 317 million barrels of crude-oil stocks remain as of July 10, according to the U.S. energy information administration.
Last week, The Wall Street Journal reported that the frequent withdrawals are straining and further stressing the strategic stockpile system and its facilities, which was established in 1975.
“There’s starting to be some concern. I don’t know how warranted it is around the ability for them to continue to draw down,” Mr. Bertamini said, although noting that the U.S. “still has some room to move down in terms of aggregate stock levels.”
In June, Amos Hochstein, former senior energy adviser to The White House, said at the Atlantic Council Energy Forum that financial markets were largely not paying enough attention to the significant drawdowns in oil stocks.
Mr. Hochstein advised former president Joe Biden in the Russia-Ukraine conflict, when the U.S. authorized the release of 180 million barrels from the strategic petroleum reserve to ease global energy shortages and fuel costs.
“These are finite resources,” he said at the forum, while also stating that continuing to draw below the 300-million-barrel mark poses serious risks to the structural integrity of the salt caverns where the stocks are stored.
As governments and refiners draw down on emergency crude reserves it raises concerns over how, and when, their stocks could be replenished.
China’s crude imports in June fell more than 40 per cent year over year, slumping to their lowest in almost a decade, according to customs data.
In addition to drawing down on its crude inventories, China has been able to cushion the loss of Gulf supply by also curbing refinery production.
“[China] had what we think were a lot of refined product stocks that they’ve been leaning on. They cut imports, they cut refinery runs, but what we can see is that domestic usage seems to be quite healthy,” Eric Nuttall, senior portfolio manager at Ninepoint Partners, said in an interview.
When the conflict began, China banned all fuel exports from top refiners as global markets tightened. By late April, state-owned companies were allowed to apply for permits to export gasoline, diesel and jet fuel.
But Beijing has lifted refined fuel export restrictions for the rest of July and allowed a private refiner to resume shipments after a four-month halt, Reuters reported last week, potentially supporting a rebound in oil shipments to China.
“We think we’re at the cusp of China returning,” Mr. Nuttall said.
If the world’s largest crude importer, China, and other countries with dwindling domestic stocks of crude and refined products increase their imports while Gulf oil remains choked, it could significantly push up oil and fuel prices.
“By necessity, when you have such a dramatic drop in available supply, you need to curtail demand, and the only way to do that is by a significantly higher price.” Mr. Nuttall said.
This article was first reported by The Globe and Mail
