A month ago, a series of news reports indicated that oil flows from Hormuz had returned to pre-war levels, pushing down oil prices. But the rout did not last. The benchmarks are set for their fourth consecutive monthly gain, and no repeat of the Gulf states exporting even more oil than before the war can change that. Because barrels aren’t everything.
“What is the price of oil? Eight months after the start of the war with Iran, this should be a simple question has become surprisingly difficult to answer,” Natasha Kaneva, global head of commodities at JP Morgan, was quoted as saying by the Wall Street Journal this week. The publication notes that Kaneva’s oil price model suggests a fair value of $94 for a barrel of Brent crude.
Yet Brent crude is trading at over $116 per barrel.
This is only confusing on the surface. Below, we find an abundance of risk for those shipping crude oil from the Persian Gulf, dozens of tankers hit by drones or missiles in recent weeks, and a tanker shortage resulting from Saudi Arabia’s shift to ship-to-ship transfers off the coast of Oman to reduce the risk of its tankers exploding in Hormuz or the Red Sea.
From all this arises the question of transport costs for crude oil produced in the Middle East. These reached unprecedented heights and prompted producing countries to sell off their oil in order to stimulate demand – although all these reports of improving oil flows into the Persian Gulf served to put pressure on oil prices. Indeed, these flows cannot be sustained, especially in an environment where the risk of missile attack is so high. Related: Japan to overtake China as world’s top LNG importer this year
“This recovery has coincided with a sharp deterioration in maritime security, as ships remain exposed to attack and insurance and freight costs have risen sharply,” UBS commodities strategist Giovanni Staunovo was quoted as saying by the Wall Street Journal.
In other words, the war bounty on oil is alive and well. But this is not the only factor that determines prices. In the first weeks of the war, some observers were surprised that oil prices did not increase. In fact, the oil market’s initial reaction to the war was very optimistic. Traders – and almost everyone else – were sure it wouldn’t last more than a few weeks, and the world was awash in oil, so it had a solid cushion of supply.
But this modest price increase only occurred in the futures market. In the physical market, oil surged. It took several months for futures and physical prices to start converging, but it appears that’s what might be happening right now, with physical prices below their highs from earlier this year. The problem for those hoping for Brent under $100 is that eight months into the war, the global supply cushion is gone, prospects for peace remain elusive and drivers are paying record prices for diesel. The price of oil reflects all of this, unlike three months ago, when it was driven primarily by President Trump’s Truth Social posts and reports citing anonymous sources saying peace was near.
Oil prices currently reflect the reality that the global energy supply crisis is far from over. Even the head of the International Energy Agency, Fatih Birol, said earlier this week that disruptions would likely continue into next year. “I’m afraid I don’t see any credible path that markets will follow next year, where we were before this war started,” Birol said. He also said the crisis would fuel the acceleration of what he calls the “electric age,” but some doubt it: Electricity prices are still quite closely tied to the prices of hydrocarbons that generate most of the world’s electricity.
In addition to all existing trends and developments, prices are stuck above $100 per barrel due to anticipation of future developments, and specifically the potential escalation between the United States, Israel and Iran. President Trump has repeatedly admitted that he is considering a resumption of hostilities after the November 3 attacks.rd midterms. Iran responded with its own threats that any return to hot war would result in retaliation. In other words, both sides are ready to resume fighting, despite continued diplomatic efforts by the Gulf states and Pakistan.
Midterm exams will take place next Tuesday. What will follow remains anyone’s guess, but it appears most expect a resumption of hostilities in the Persian Gulf. And that means a higher war bounty and a further extension of the energy supply disruption that has become this year’s defining event. Regardless of analyst models, prices will remain high until there is a clear sign that peace is a real possibility.
By Irina Slav for Oilprice.com
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