Why $100 Oil Is Hard to Kill
Brent Crude oil prices have held above $100 per barrel for most of the past month despite numerous reports and figures put out in recent weeks by tanker-tracking services and investment banks that crude oil flows from the Strait of Hormuz have recovered, and even exceeded, pre-war levels. But if so much crude is leaving the Middle East again, why do Brent prices continue to hover around the $100…
For the past month, Brent Crude oil prices have remained above $100 per barrel, despite reports indicating crude oil flows from the Strait of Hormuz have recovered and even surpassed pre-war levels. The reason for this ongoing price level, combined with a decrease from $60 per barrel prior to the war, is multifaceted. The operational challenges of bringing Middle Eastern oil to market have become increasingly difficult.
Freight rates are at record highs, and war risk premiums have surged due to ongoing attacks on tankers in the Strait of Hormuz. Gulf producers have resorted to less efficient routes, which increase costs and extend the time required to supply crude to refineries. Meanwhile, refiners are working to maintain high processing rates to capitalize on record-high refining margins, producing more diesel, a barrel type that remains stressed in the market.
Fuel exports from the Middle East are limited, with Russia unable to export diesel due to Moscow's ban, and China controlling domestic supply, curbing fuel exports overseas. Global inventories have plummeted this year, as a response to the initial relief following the Strait of Hormuz disruptions in April and May, saw crude and fuel stocks being drawn down.
Inventories are now so depleted that they may not be enough to counteract another escalation in the U.S.-Iran conflict. The geopolitical situation surrounding oil prices remains uncertain, with the potential for further escalations, particularly before or after the U.S. midterm elections in early November.
Analysts caution that a sustained decline in Brent oil prices would necessitate broader normalization of supply, increased product exports, and reduced political and financial risks to shipping. The recent announcement by the G7 of releasing 100 million barrels of crude oil and diesel stocks had an initial impact, but the market remains cautious about the true extent of these releases.
Even the price of North Sea's Oseberg and Fortis crudes is higher, at around $140 per barrel. Key uncertainties include whether Iran will launch further attacks before the U.S. midterm elections, if the U.S. will retaliate after the elections, and if Saudi Arabia can maintain the Strait of Hormuz's 17.5 million barrel per day (mb/d) capacity open.
The Houthis have also been known to attack the Saudi east-west pipeline and ships attempting to traverse the Bab-el-Mandeb Strait, as the Saudi-backed Yemen government attempts to regain control in the Red Sea.
The market's focus is not only on how much crude is being loaded but also on whether these barrels can be delivered safely, reliably, and at low cost. Senior oil analyst Xuyi Zhao from Guotai Junan Futures notes that the higher cost of getting crude to refiners and low inventories unable to offset another near-term disruption could lead to a new price spike if another crude supply route in the Middle East is attacked.
Emergency reserves may provide temporary relief for the winter, but they cannot address long-term supply issues. Saudi Aramco's CEO, Amin Nasser, warns that the supply resilience cushion is "scarily thin."
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