The chaos that has gripped the oil market looks set to deepen, with more production getting cut as the war in Iran effectively shuts the Strait of Hormuz, and the US considers widening its range of targets in the country.
Iran has vowed not to back down in the face of US and Israeli strikes that began on Feb. 28. President Donald Trump responded on Saturday by saying the US would now consider targeting areas and groups of people in Iran that were not previously aimed for. The attacks will continue “until they surrender or, more likely, completely collapse!” he said in a social media post.
Other markers tied closely to the region have already soared through that level. Futures tied to Abu Dhabi’s flagship Murban crude closed at $103 a barrel on Friday, while Oman crude futures were at $107. Chinese crude oil futures on the Shanghai International Energy Exchange ended, in US dollar terms, at $109.
“Every additional day of disruption adds pressure, and in that scenario there is effectively no ceiling to prices in the short term,” said Stefano Grasso, a one-time physical energy trader who’s now senior portfolio manager at Singapore-based fund 8VantEdge Pte.
The effective closure has led to Iraq’s pumping dropping to about 1.7 million to 1.8 million barrels a day, down from about 4.3 million a day pre-conflict, according to people with knowledge of the matter.
Saudi Arabia, meanwhile, is directing unprecedented amounts of crude to its Red Sea coast. Shipments from its western terminals have surged to a rate of about 2.3 million barrels a day so far this month, ship-tracking data compiled by Bloomberg show. While that’s about 50% more than the kingdom has shipped from Red Sea in any month since the end of 2016, it’s far below the 6 million a day that the country has exported from the Persian Gulf in recent months.
“This is an excursion,” he said on Saturday. “We figured oil prices would go up, which they will, they’ll also come down, they’ll come down very fast.”
Import-dependent Asia, which leans heavily on the Middle East, is feeling the most immediate pain.
In Japan — which takes over 90% of its crude from the region — refiners are asking for the option of drawing on national oil reserves. Others, including China, have curbed fuel exports to preserve supply and keep domestic prices controlled. South Korea is considering reinstating an oil price cap for the first time in 30 years, state news agency Yonhap reported on Sunday, citing government officials.
“This scenario doesn’t necessarily mean that we see a full end to the conflict in this time period,” he said. “But if US and Israeli strikes degrade Iran’s ability to attack vessels and enforce a closure of the Strait of Hormuz, we could see flows starting to normalize.”
The bank’s most dramatic scenario is a three-month, full disruption to oil and liquefied natural gas flows. This would likely see oil prices spiking to records through the second quarter, the bank’s analysts wrote in a note.
