The new, particularly dangerous phase of Middle East war threatens to break all the limits in the market oil.
So far, the market has been proven «challenging» The Commission's proposal for a Directive on the approximation of the laws, regulations and administrative provisions of the Member States relating to restrictions on the marketing and use of certain dangerous substances Straits of Hormuz (of which, in normal circumstances, approximately 20% of world oil production is passed). So far, the solutions that have been found in the face of the greatest oil shock in the history of the planet have been «protection» consumers from an inflation crisis and fuel availability.
During the ongoing war, crude oil prices increased to unpleasantly high levels, although they never approached the level of $128 a barrel (which reached 2022) or the historic record of $146 a barrel (just before the 2008 Great Depression).
However, as he says in his analysis CNN, the ever increasing pressure in the Middle East and the new escalation of conflicts could lead oil to overcome historical landmarks.
Read more
«The conflict has entered a clearly more dangerous phase», stated Helma Croft, head of global strategy at RBC Capital Markets, stressing that this could bring down the well-known saying that «the market always finds a solution».
On Thursday, oil exceeded $100 for the first time since May. In the US, petrol prices are now stable over $4 and diesel over $5.20 a gallon. The bond market is sending messages that it is currently more concerned about the inflation problem than any other time during President Donald Trump's second term.
As CNN points out, any factor that prevented oil from rising over the last five months has either been weakened or disappeared. The monster of high oil prices threatens to break its limits.
The outlet for oil
To date, oil has bypassed the conflict zone through the Red Sea. Now, oil drowns in two critical points.
Iran's attacks on oil tankers in the Straits of Hormuz have frozen most of the crude oil traffic through this particular, critical waterway. Fatally, the market became creative and channeled about 7 million barrels of oil a day into Red Sea, which would normally be intended for the Persian Gulf, according to JPMorgan.
Now, these solutions are vulnerable, noted Capital Economics. The blockade by the Huthi has blocked another exit point for about 5 million barrels of Saudi oil a day.
Saudis can redirect this oil north through the Suez Canal, but the largest, fully loaded oil tankers cannot pass through this sea road, due to depth constraints, noted Natasha Caneva, head of the world freight strategy at JPMorgan. Even if oil is placed on smaller tankers, their course through the Mediterranean and around Africa turns a typical four-week journey into an eight-week journey.
Insurance
To this day, insurers charged ships with a high war premium. No longer will insurance contracts cover ships paying tolls in Iran.
Ships seeking to exit the Straits of Hormuz during the war had to pay high premiums – but at least they could receive insurance. Lloyd’s Market Association, a group representing maritime insurers, now questions whether ships leaving the Straits could receive insurance contracts in the future.
Iran said it plans to re-impose tolls from $1 to $2 per barrel of oil, earning millions of dollars per ship for the regime. This poses an unacceptable risk for insurance companies, LMA said: Toll payment in Iran is illegal because it violates US sanctions.
Toll payment can cancel a ship's entire insurance policy, creating an exceptional risk for shipping companies. With Iran insisting that it has the right to attack ships trying to pass without paying, ships essentially have no way out of the Straits
Extension of the crisis
To date, the oil conflict was isolated in the Middle East. Russia is now a large part of the energy problem.
Ukrainian attacks with drones at Russian refineries and at the Caspian Pipeline Consortium terminal in the Black Sea, have created a major new problem for the global energy market.
The attacks created a huge fuel shortage in Russia, leading the country to the ban on diesel exports. This removed a huge amount of fuel from the market: Prior to the ban, Russia exported 800,000 barrels of diesel a day – 12% of global diesel missions, according to Andy Lipow, president of Lipow OilAssociates.
Ukraine's attacks on the Black Sea have also affected the supply of crude oil at the worst possible time. The pipeline does not produce a single ton of oil, but threatens to remove 1.7 million barrels a day from the global oil market, just as millions of barrels are blocked through the bypasses of Ormuz.
Stocks are draining.
To date, the world was overpowered with oil. Now, crude oil reserves are reaching critically low levels.
The most fundamental difference between the start of the war in Iran and the current situation is the amount of oil stored worldwide. Reserves of crude oil were in historically high before the war, but have been reduced by 1.3 billion barrels in the past five months, according to Dan Pickering, head of investment in Pickering Energy Partners.
This is a particular problem for the United States: The U.S. Oil Strategic Reserve has been reduced by 116 million barrels since spring to its lowest level since 1983. They only have 60 million barrels to spend before reaching the threshold set by Congress.
US trade reserves are also approaching their operating minima. It is a reality that Trump in June said could create a «financial disaster», which would make him compare to the president of the Great Depression era, Herbert Hoover. And this time, there is no rescue from the oil trapped in Ormuz.
More than 200 million barrels of oil escaped the Straits in June during the short ceasefire agreement. Now, only 44 ships are inside the Straits, compared to 97 just before the Memorandum of Understanding, according to Navin Das, an analyst for Kpler.
Road race with time
To date, China has enough oil stored to withstand the crisis. Now, it seems that China cannot last forever.
Demand for oil has collapsed over the past five months, mainly because China has had the foresight to store oil before the war, so that it does not have to import so much at high prices. But China cannot rely so much on its reserves for much longer. It has about three to four months before it needs to increase its imports, Caneva points out.
So, now, the oil market is in a race by time. Prices remain relatively restrained, given its strict basic sizes. The destruction of demand still prevails over supply restrictions.
However, prices will continue to rise if the status quo remains, according to Daan Strueven, head of the oil research at Goldman Sachs. He believes oil could taste these highs of 2022 over $120 a barrel, by October. Croft believes the threat is even greater: If a full regional war breaks out, oil could record over $150 a barrel.
