One can look at oil and the Middle East through two lenses. Magnify every detail from the attacks on Iran and its responses and a chaotic picture emerges. When the market reopens on Sunday night, oil prices are likely to jump 10%-15% as a result. But seen from a wider angle — looking broadly at the global economy — the energy picture does not appear as scary, even if Brent crude does jump to, say, $80-plus a barrel.
First, an obvious disclaimer. The situation is fluid, and for the oil market everything depends on how Tehran responds to the US-Israeli strikes in the coming hours. But after the first day of hostilities we can draw a few tentative conclusions based on the unlikelihood of the type of full-blown oil shock we’ve seen in the past, and the decent supply of barrels of oil currently available. The biggest market fear is the targeting of energy infrastructure (or not) by both sides, and the enforced closure of tanker routes. Neither has happened. Yet.
Put the war and its likely geopolitical impact into historical context, and you’d be forgiven for being anxious. The Americans and Israelis launched coordinated air strikes on Iran, killing the Supreme Leader Ayatollah Ali Khamenei and scores of other senior officials. Iran responded with an unprecedented volley of missiles and drones, hitting Israel, Jordan, Kuwait, Oman, the United Arab Emirates, Saudi Arabia and Bahrain. The Islamic Republic is fighting for its own survival. Cornered, Tehran can still weaponize oil as its last line of defense. It’s a huge risk.
With a different economic backdrop, this wouldn’t just be the mother of all oil shocks; it would be the rest of the family, too. It’s Hollywood stuff that only a few years ago would have led to predictions of oil zooming past its 2008 high on the way to $200 a barrel. That would have put the global economy on its knees, with runaway inflation likely forcing central bankers to hike interest rates and potentially crashing the financial markets.
For sure, the oil price is going to spike. But even the most bullish traders are talking about perhaps reaching $100, well below the $139 seen in 2022 after Russia invaded Ukraine, and 2008’s all-timer of $147.50. Using that wide-angle lens, the Middle East isn’t about to trigger an oil shock. It may be a wobble, perhaps a tremor, it may even get nasty, but the economy isn’t heading into recession a la 1973-74 after the first oil crisis, or 1990-91 after Saddam Hussein invaded Kuwait. The main reason for this is the one that will have emboldened Trump and his military strategists: The US shale revolution, which hands the US a much stronger hand in controlling prices.
And despite fears that Iran could set the Middle East’s energy industry on fire, targeting oilfields, refineries and export terminals, Tehran hasn’t yet turned oil into a weapon. Neither have Israel and the US targeted Iran’s oil infrastructure. The Iranian retaliation has been loud, but it appears largely ineffective so far. The US has said three service members were killed and five “seriously wounded.” The damage elsewhere in the Gulf is relatively minor.
For energy markets, the biggest worry is the Strait of Hormuz, the narrow body of water to the south of Iran that’s a chokepoint for about 20% of the world’s oil. Shipping traffic has fallen sharply, although a handful of tankers passed through overnight without incident. Despite wild claims on social media, Iran has not closed the strait.
Any stoppages are being self-imposed by the shipping and oil industries, in part responding to some insurers withdrawing coverage and in part at the request of the US Navy in the first hours of the conflict. There’s a bit of a buffer, as oil exporters such as Saudi Arabia, and even Iran, increased loadings in the days running up to the attacks. Oil exports from the Persian Gulf were nearly 10% higher in February than the month before. The bulk of that has already left the region. Still, unless Washington quickly convinces shipping firms that the strait is safe, the self-imposed pause would turn into real disruption.
In a social-media video, President Donald Trump promised to “annihilate” the Iranian navy, an indication of the White House’s maritime priorities. The clock is ticking, and Hormuz will make or break this crisis. Fatih Birol, the head of the International Energy Agency, put it well by saying, “Markets had been well supplied to date.” Those words “to date” are key. If oil prices get ugly, Trump may create an off-ramp for himself. Having killed Khamenei, he can claim “mission accomplished” and move on.
Thankfully, the physical oil market entered the crisis weak in terms of pricing pressure. For months supply has run ahead of demand, allowing inventories to slowly refill, albeit from a low level. Now the industry is heading into a couple of months of weak demand as the northern hemisphere emerges from winter.
For the last two years, China, the biggest buyer of Middle Eastern crude, has been building a massive strategic petroleum reserve, which could limit the wider market disruption. Iranian oil is sold almost exclusively to Chinese refineries. If needed, Western nations can tap their reserves as well.
And while the physical market has been weak, the financial oil market has been bullish, snapping up oil in the expectation of rising prices. A year ago, Israel and America’s 12-Day War on Iran wrongfooted many traders, triggering a wave of buying that caused crude prices to leap. This time, the number of bullish positions is at one of the highest levels over the past 10 years. As such, oil traders are better prepared to digest the crisis.
The OPEC+ oil cartel can help cushion some of the impact, but more with words than barrels. On Sunday, the group announced a production increase for April, and hinted more to come. Still, unless the Strait of Hormuz fully reopens, all the incremental barrels will be trapped. Saudi Arabia and the UAE have pipelines that let them bypass the strait, partly anyway. If the conflict intensifies, they will highlight that alternative.
One of the world’s chief oil bulls, of course, resides in the Kremlin. Vladimir Putin will benefit from the war via loftier oil prices and greater demand for his own sanctioned crude. Barely hiding his glee, Russia envoy Kirill Dmitriev posted on social media on Saturday: “$100+ a barrel soon.” He may be a tad too bullish, but directionally he’s not wrong. Perhaps more important, Russia may find it easier to sell in the black market the millions of barrels of oil it has sitting in storage. If the White House turns a blind eye, India may buy them. That is hardly ideal for anyone trying to counter Putin’s belligerence, but it would ease any global crude shortage linked to the Strait of Hormuz.
No comments:
Post a Comment