Hormuz Risk Opens $40-Plus Price Gap Between Crude Grades
Back in late June, after the United States and Iran agreed to cease hostilities in the Persian Gulf for 60 days, oil prices took a dive. Two months later, Brent is trading at over $107 per barrel, and WTI is moving closer to $103, as a deep chasm opens up between the price for oil stuck in the Gulf and oil that can be moved with no threat of a drone or missile attack. Iraq, OPEC’s number-two…
In late June, following a 60-day ceasefire between the United States and Iran, oil prices plummeted. Currently, Brent crude is trading above $107 per barrel, while WTI hovers near $103. A significant gap has emerged between the price of oil affected by the conflict in the Persian Gulf and oil unaffected by the ongoing hostilities.
Iraq, OPEC's second-largest producer, has faced severe disruptions to its oil industry as a result of the conflicts. The nation has been forced to shut down wells and offer substantial discounts on its oil to attract buyers willing to navigate the risks of transporting it out of the Persian Gulf. Despite reports that Iran has granted exemptions to Iraqi oil shipments from attack, Iraq's Basrah Medium for loading next month is being sold at a $43.06 per barrel discount compared to the regional Murban benchmark, according to Reuters' Clyde Russell.
This discount is offered despite Murban crude, ADNOC's flagship blend, trading at over $127 per barrel, which underscores the price disparity between oil constrained by the Hormuz chokepoint and oil not affected by the conflict. Ship-tracking data indicates that tanker movements through the Strait of Hormuz have been limited, particularly after recent attacks.
However, once oil leaves the Hormuz area, its price increases sharply. This suggests that as long as the dangerous waterway remains secure, demand for physical oil outweighs any concerns about safety and insurance. This observation highlights the robustness of crude demand even in the face of significantly higher prices compared to the beginning of the year.
Crude produced outside the Persian Gulf is also benefiting from higher prices. One notable example is Australian blend Pyrenees, which was trading at $138.04 per barrel last Friday, a sharp contrast to its price of $70.59 per barrel in February 2022, just before the U.S. and Israel initiated their attacks on Iran, triggering the war and the closure of the Hormuz.
The Pyrenees is currently the most expensive crude blend according to Reuters' Russell. Russian crude is also commanding a premium over Brent, despite sanctions. Even Chinese independent refiners have been rushing to replace Iranian barrels, which have been paralyzed by the U.S. naval blockade in the Persian Gulf, as per the ESPO blend, which loads in Russia's Far East, trading up to $10 per barrel above Brent.
Indian refiners have also been purchasing more ESPO loading from the port of Kozmino, leading to a 6% increase in exports of the blend in the first half of the year. Demand for oil is expected to remain strong throughout the second half of the year. Despite the challenges Iraq is facing in getting its oil out of the Hormuz, Saudi Arabia is working to repair its crucial East-West pipeline, while the Yemeni Houthis have struck additional targets in the kingdom.
The war is not only nearing its conclusion but appears to be escalating. The price gap between oil destined for the Hormuz and other types of oil, whether sanctioned or not, may yet widen further.
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