Emmanuel Addeh in Abuja
Oil prices approached $100 a barrel yesterday, with traders and analysts warning of a renewed supply crunch, as hostilities between the US and Iran exacerbated supply concerns.
The price of benchmark Brent crude rose above $98 a barrel during the day for the first time since late July, following US strikes on three Iranian crude oil tankers over the weekend in retaliation for Iranian missile attacks on two US Navy warships.
Hostilities continued with an attack on Saudi Aramco oil facilities in the Saudi Arabian city of Jizan on Monday, a report by FT stated.
“This represents a significant escalation,” said Arne Lohmann Rasmussen, chief analyst at Global Risk Management. He said markets would now watch for signs of disruption to oil shuttling services run by oil producers and traders, which use ship-to-ship transfers just outside the Gulf and have been a lifeline for oil markets in recent months.
Oil prices fell from an Iran war high of $126 a barrel in late April to just over $70 in early July after a ceasefire agreement between Washington and Tehran raised hopes of a lasting peace. They have been on a rising trend since, as prospects of peace have been scuppered by fresh hostilities, with analysts raising concerns about supplies as strategic reserves are drawn down.
Daan Struyven, co-head of global commodities research at Goldman Sachs, said on Monday that Brent could reach $120 a barrel “[if] shipping attacks broaden and intensify”. Events over the past few days suggested this would be the case, he told Bloomberg TV.
Energy Aspects, a consultancy, said commodity funds that had spent much of the conflict betting on lower prices or staying on the sidelines were now “turning bullish, largely driven by the view that a tipping point in global [reserves] is approaching”.
It added that oil reserves outside China had fallen by more than 400mn barrels since the Iran war began and the volume of oil in tankers at sea was at “multiyear lows”.
China has also recently re-entered the market, said June Goh, an analyst at Sparta Commodities. Early in the war, as prices soared, Chinese buyers cut their purchases by a third and instead drew down their reserves.
Goh said Chinese buyers had since turned to Iraqi and Saudi crude, despite high prices, because they could not source enough Russian and Iranian crude to meet their needs. “They have run out of their base options if the government is not telling them tPrices “will continue to move higher”, said one executive at a major oil trading firm. “The issue is whether it is a slow burn or a fast move.”
Buyers had been holding back in anticipation of an end to the war, but now “something has to break”, the executive added. “Either crude has to go higher or [refined] products have to really materially move higher” in order to reduce demand to match supply.
Prices for some refined fuels have already surged to record highs. Wholesale diesel in the US has been trading at more than $100 a barrel above the price of crude oil since last month. European prices rose above that level last week.
“The refined products will tell you that we are [at a crunch point] already. Diesel at an all-time high tells that story. Diesel is twice the price of crude, that has never happened before,” said Martijn Rats at Morgan Stanley.
“There is a hundred-dollar incentive in the US to take crude and turn it into a barrel of diesel,” he said.
Refining capacity in the Gulf has been cut off from markets since the start of the war, with processing facilities elsewhere in the region coming under frequent attack. Ukraine said it hit refineries in Russia’s Perm region and Tatarstan on Sunday night, in a campaign of drone strikes that has cut Russia’s refining capacity by more than 30 per cent.
Traders are increasingly taking the view that the Iran war will take much longer to resolve than previously expected, the FT report added.
One trading house executive said their base case was now that the Strait of Hormuz “would never return to normal”, referring to the prewar flows of 20mn barrels a day of crude and fuels that used to pass through the chokepoint.
Spencer Dale, a professor at the London School of Economics and former chief economist at BP and the Bank of England, said crude had remained cheaper than expected partly because more oil was getting through Hormuz than commonly believed and inventories had taken longer to run down.
“But we cannot keep on drawing reserves,” he said. “If you’d asked 100 oil experts six months ago and said, this is what’s going to happen, I don’t think anybody would have said oil prices are still below $100,” Dale said.