Oil producers, traders, and refiners are bracing for a prolonged war between the United States and Iran in the Persian Gulf with little to no hope of a quick resolution. By extension, they are also preparing for higher prices for longer, a theme present at this year’s edition of the Asia Pacific Petroleum Conference.
Reuters’ Clyde Russell reported this week that the mood at APPEC was not particularly cheerful as hostilities in the Middle East escalate once again, suggesting achieving peace would be quite a challenge. The Reuters columnist called it “a war of egos”, in which neither the U.S. president nor Iran’s leadership would accept anything less than an ostensible victory.
However, Russell also reported that the Asian oil industry wants Trump to leave the Persian Gulf and let the local countries deal with “the mess” that the U.S. and Israeli strikes on Iran left. Clearly, this is the most unlikely scenario of all possible scenarios, so drillers, traders, and refiners in Asia and beyond are preparing for a long disruption in oil flows out of the Middle East—and waiting for the U.S. midterm elections.
“We need a political settlement, but that will take regime change in Washington or Tehran,” one APPEC delegate told Reuters’ Russell, adding that it was more likely for regime change to take place in the United States than in Iran, which appears to be a widely shared view among the event’s delegates. However, it would be difficult to argue that a Democrat win at the November midterms would translate into any form of regime change. This, in turn, means the war will likely extend into next year and possibly last until Trump’s term in office ends.
The implications of such a scenario are rather unpleasant, economically speaking. Brent is back above $100 per barrel, and this is just the futures price, not the price for physical deliveries. Those often cost a lot more, Russell and other commentators have repeatedly pointed out. Bloomberg just this week reported that Russia’s ESPO blend has surged to a premium of some $20 per barrel to Brent crude as Chinese independent refiners run out of alternative options, with the U.S. naval blockade on Iranian ports and the grab for Venezuelan crude cutting off two main supply channels.
Traders appear to have started paying more attention to physical prices than the futures market chart, Russell also noted in his report. This is a positive development because the fixation on futures prices missed a lot of what was happening in the physical market, which was mostly higher prices due to surging insurance and freight rates.
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Tanker rates this month hit an all-time high as escalating risks to shipping in and out of the Middle East prompt traders and tanker operators to undertake inefficient and more expensive trade routes. The much longer workarounds are tying tankers and supertankers for longer with the shippers, tightening the market of available vessels so much that rates are skyrocketing to all-time highs. The benchmark daily rate for a very large crude carrier to ship oil from the Middle East to China has hit a record high of almost $800,000, per data compiled by Bloomberg.
Reuters’ Russell, meanwhile, reports that the freight rate for a tanker from the Persian Gulf to North Asia has surged to $30 per barrel of crude, up from $6 per barrel before the war. Insurance rates are also soaring, currently running at $2.50 per barrel, up from $0.05 per barrel. This means Persian Gulf producers need to offer discounts in order to move their oil—risking a missile strike in the process, no less—and these discounts have become the new focus of attention for traders. The other focus is the premium that blends sold outside the Gulf command, with Russia’s ESPO a case in point.
What is a difficult situation in crude oil is a lot more difficult in fuels. The fuel crunch is getting increasingly severe, and a prolonged war for the Strait of Hormuz will make matters quite a lot worse, as stated by industry executives at APPEC earlier this week. “We’re still not running enough refining capacity to prevent those draws, and we keep eating into the surplus that exists around the world,” Vitol’s Russell Hardy said at the industry conference.
Refineries have been running at higher than normal rates to make up for lost production from the Middle East and Russia, but this has not been enough because, as noted by Vitol’s chief executive, there is not enough capacity to make up for all the production lost.
When the U.S. and Israel launched those first strikes on Iran, the general mood was that the war won’t last more than a week—perhaps a month. Then the timeline got moving, as it became clear that it was not going to be as easy to subdue Iran as expected, and as Iran shocked everyone by finally following through on its threat to close the Strait of Hormuz. Peace is not an immediate option, it seems. Brent and WTI are both over $100 per barrel. And there is no end-of-the-week Truth Social post by President Trump about the resumption of negotiations. This is, to put it mildly, not a good sign.
By Irina Slav for Oilprice.com
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