Trump’s restart of his war on Iran will likely lead to much higher oil prices than the world has experienced during the previous active phase of the conflict.
The world consumes about 100 million barrels of oil per day [bpd]. Before the war on Iran some 20% of that used to pass from the Persian Gulf region through the Strait of Hormuz to the world markets.
During the 2nd recent war on Iran in March of this year the Strait was closed. This led to a strong rise in oil prices. But the catastrophic economic damage many experts had expected (archived) and feared did not occur.
The reasons were threefold:
1. Some of the oil coming from the Gulf region was diverted to different routes:
- Saudi Arabia used its trans-country pipeline to divert output from its eastern coast in the Persian Gulf to its western Red Sea coast. After a few weeks that outlet at the harbor of Yanbu had reached its maximum capacity of some 4-5 m bpd.
- The United Arab Emirates used pipelines from its oil fields within the Persian Gulf to its southern coast harbor of Fujairah. It thereby avoided to pass that oil through the Strait of Hormuz.
- Iraq transported some oil via trucking to Syria and Turkey.
- Under the ceasefire MoU between the U.S. and Iran the blockaded tankers loaded with oil could escape from the Gulf.
2. Additional oil was brought to the market:
- The U.S. and some of its allies raided their Strategic Petroleum Reserves to calm down oil prices.
- The U.S. lifted sanctions on Iranian and Russian oil exports.
- Oil production within the U.S. increased.
3. Demand was lowered:
- The most important contribution here was the unexpected lowering of imports in China. The country managed to draw on its own huge reserves. It also used coal instead of oil as feedstock for its chemical factories.
- Higher prices at the pump led to at least some demand shrinkage in various countries.
In total some 7 m bpd exited the Gulf region through new outlets. The releases from reserves and the lifting of sanctions contributed to additional supplies of some 3-5 m bpd. The reduction of Chinese import demand amounted to some 5 m bpd.
Due to all the above measures the global supply of about 100 m bpd only shrank to about 92-95 m bpd. Global demand, especially due to the Chinese measures, dropped to a nearly equal balance. The amount that was still missing in this rough calculation was drawn from reserves within the distribution and transport levels.
After all measures were in place demand and supply were balanced again and oil prices came down to a normal level of some $70+/bl.
When U.S. President Donald Trump decided to reignite the conflict he might have thought that the oil problem he had feared had gone away.
But it hasn’t. And the conditions now will make it way more difficult to keep the markets in balance.
1. Oil diversion from the Gulf is practically finished:
- Yesterday Saudi airplanes attacked the airport of Yemen’s capital Sana’a. Following that the ruling Ansarullah coalition announced that the Bab el-Mandeb outlet of the Red Sea would be closed for Saudi shipping. Saudi output through its in-country pipeline and Yanbu harbor will thus shrink to the level that can pass on smaller ships through the Suez Canal. This will likely be less than 1 m bpd.
- Yesterday Iran attacked two UAE tankers near Fujairah. The alternative UAE outlet is thus also closed.
- The Strait of Hormuz was again declared closed. There will be no more oil escaping the Persian Gulf region.
2. Additional sources of oil are no longer available:
- The U.S. strategic reserve is now near its lowest possible level. Any additional withdrawal from it will damage or destroy the salt caverns used for its storage.
- Sanctions against Iranian and Russian crude oil exports have been reintroduced.
- Ukrainian attacks on Russian refineries as well as loading and transport infrastructure in the Black Sea have reduced Russian exports of petroleum products. Russia has completely stopped its export of diesel which usually amounted to some 800,000 bpd.
- Reserves in transport and distribution stages are at record low levels.
3. Demand is increasing:
- After a record slump of imports China restarted its buying of crude oil.
- Summer season is upon us. Vacation travel in the U.S. and Europe will increase seasonal demand. This will especially hurt stocks of jet fuel of which Europe has less than a month supply.
Nearly all the favorable conditions which had allowed the world to ride out the supply slump during the last phase of the conflict are no longer available during the current one.
While the cash settled future markets will continue to be highly manipulated, real product prices will increase. We are likely to soon see new peaks of prices at gas stations.