Oil Prices Surge over 12% as U.S. Iran War Disrupts Flows


   
Karim Bastati
DTN Analyst

   VIENNA (DTN) -- Oil and product futures surged Monday (3/2) morning as 
tanker traffic through the Strait of Hormuz ceased almost entirely. It was the 
largest one-day spike since Russia's invasion of Ukraine four years ago.

   The disruption followed massive U.S. and Israel strikes on Iran over the 
weekend, after negotiations over Tehran's nuclear program ended last Friday 
without a deal.  

   Front-month Brent and WTI futures spiked more than 12% in early morning 
trade and were up more than 8% as of 7:30am ET, the highest since June. ULSD 
futures rocketed more than 17% before leveling out near a two-year high, up 15% 
on the day.

   The Strait of Hormuz, the narrow connection between the Persian Gulf and the 
Gulf of Oman, is the largest chokepoint for global oil flows. Some 15 million 
bpd of crude oil and condensate, and more than 5 million bpd of petroleum 
products transit through the Strait, representing about 20% of global supply. 
Live marine traffic tracking showed hundreds of tankers have already dropped 
anchor on both sides of the passageway. Many shippers have suspended operations 
after multiple tankers were struck by the Iranian military.

   Production and refining were also affected by a series of counterattacks. 
Saudi Aramco shut operations at the country's largest refinery following an 
Iranian drone. The Ras Tanura refinery with a capacity of 550,000 bpd is a 
major producer of middle distillates and a key supplier of diesel for Europe. 
European gasoil futures jumped 20% following the closure.

   Most of the region's oil exports are loaded in the Persian Gulf. A prolonged 
closure of the Strait of Hormuz could quickly fill the limited storage space 
and force some production shut.

   Supply risks had already partially been priced in ahead of the outbreak of 
the war. Prior to this weekend's Israeli strikes, crude oil futures, propelled 
by a growing geopolitical risk premium since the beginning of the year, traded 
near seven-month highs.

   Members of the Organization of the Petroleum Exporting Countries and their 
partners agreed to raise output by 206,000 bpd in April. The quota increase 
came after a three-month production hike pause and was largely expected.

   Considering recent disruptions to oil flows from the Middle East and the 
supply risks an escalating war with Iran would carry, the new production target 
seemed rather modest. Saudi Arabia, however, who sits on most of the group's 
spare production capacity, separately started to raise output and exports by 
some 500,000 bpd in recent weeks in anticipation of potential U.S. and Israeli 
strikes on Iran.

   NYMEX WTI crude futures for April delivery shot up $5.66 to $72.68 bbl, and 
ICE Brent crude for May delivery jumped $6.30 to $79.17 bbl.

   Downstream, RBOB futures for April delivery climbed $0.1154 to $2.4009 
gallon, while ULSD futures rocketed $0.3841 to $2.9801 gallon.

   The U.S. dollar index strengthened by 0.71 points to 98.275 against a basket 
of foreign currencies.




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