Iran war’s ugly truths point to oil prices racing higher again
Energy analysts suggest the Middle East war’s upcoming consequences of global oil and gas supply shortfalls could spell much higher prices than those quoted this week.
Oil prices could surge higher over the months ahead as the Strait of Hormuz’s closure and destruction of Middle Eastern energy infrastructure translates into history’s biggest oil shock, falling inventories and an intensifying global scramble for supply.
On Thursday, benchmark Brent Crude futures for delivery in May topped $US110, but analysts believe this paper price under-cooks the potential for prices to spiral once the reality of physical supply cuts ripples across the globe.
“There’s now no policy response that can stop this ascent in crude, none,” former Goldman Sachs head of commodities, Jeff Currie, told Bloomberg.
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By continuing you agree to our Terms and Privacy Policy.The uncomfortable truth is central banks cannot print oil or gas to offset a supply chain shock equal to around 18 million barrels a day of oil being removed from the global market due to the Strait of Hormuz closure.
The estimated supply chain cut is equal to 15 to 20 per cent of the world’s pre-war daily consumption of 100 million barrels a day and Mr Currie warned to brace for higher oil prices even if the Strait of Hormuz reopened tomorrow.
Historic shock
On Thursday, Prime Minister Anthony Albanese warned Australians the nation is confronting the biggest energy shock in global history.
As part of its emergency response, the International Energy Agency said it would release 400 million barrels of oil from its strategic reserve.
However, Mr Currie dismissed this as another policy response that will make no difference to oil’s expected climb.
“You can release 400 million barrels, but flow rate is what matters,” he told Bloomberg. “The maximum sustainable flow rate is 2 million barrels per day, so that takes 200 days to get out. You put that in the context of a disruption of 18 million barrels a day, and you’re miniscule in terms of offsetting it.
“This is not just a disruption of oil, it’s gas, fertilisers, petrochemicals the list goes on. And you’ve disrupted supply chains all over the world. Ships are in the wrong places and insurance is being cancelled.”
JP Morgan warns about higher oil ahead
Another signal that the widely quoted benchmark Brent Crude and West Texas Intermediate futures prices of between $US100 to $US110 a barrel on Thursday may understate the scale of the upcoming crisis is that prices for the immediate delivery of physical oil in Dubai fetched as high as $US148 a barrel on March 16.
If prices for immediate physical delivery in the Middle East are far higher than the paper price for delivery at the existing month’s end contract (the benchmark paper price) it suggests the “benchmark price” is not reflecting the real tightness in current supply.
Oil markets are vast and complex with multiple grades and quotes at different prices for delivery into the future, but JP Morgan’s energy analysts have also warned the vast gap between prices for immediate delivery in the Middle East and those quoted by traders in the West may soon close.
“The apparent stability in Brent and WTI should not be taken as evidence of ample global supply,” JP Morgan said.
“It reflects a temporary buffer created by regional inventory overhangs, benchmark composition, and policy interventions.
“If the Strait does not reopen, this divergence is unlikely to persist. Brent and WTI will ultimately reprice higher as Atlantic basin inventories are drawn down and the global market is forced to clear at a materially tighter supply level.”
Physical destruction of energy infrastructure worsens
Moreover, the ballooning physical damage to sophisticated energy infrastructure across Iran, Iraq, Oman, Bahrain, Saudi Arabia, Qatar, and the UAE will take months, or years to repair, as Mr Currie points out.
On Thursday morning, the destruction of critical supply-side infrastructure got worse as Iran’s Pars gas field and Qatar’s Ras Laffan both took direct missile hits. Ras Laffan alone accounts for a giant 20 per cent of the world’s liquefied natural gas supply.
While on Thursday afternoon, chaos agent and US President Trump threatened to “blow up the entirety” of Iran’s key gas field if he decided it necessary
Australian motorists are already paying the cost. On Thursday, prices for Premium 98 unleaded petrol reached as high as $2.69 a litre in Sydney’s east and hit fresh records at slightly variable levels across the nation since the war began on February 27.
The latest highs means petrol costs are now up around 35 per cent since before the war started and up 12.5 per cent since March 3. Shares also slumped another 1.7 per cent on Thursday to take losses to near 8 per cent since the war’s outbreak. And the bad news is shares could fall further as petrol prices climb higher yet.
