Analysis: Oil Futures Fail to Reflect Hormuz Supply Impact


   
Karim Bastati
DTN Analyst

   VIENNA (DTN) -- Oil futures hit four-year highs on the U.S.-Israel war on 
Iran and remain about 50% above ante bellum levels but traders still appear to 
be pricing in unfounded optimism for a quick supply restoration not reflective 
of the current disruption's severity.

   Front-month Brent futures rallied in March to $119.50 bbl, about 65% above 
pre-war prices, compared to the 22% jump in the early weeks of the outbreak of 
the Russo-Ukrainian war, when they peaked at $123.21 bbl. The Brent high for 
April though was $111.89 and it moderated further to $104.47 this week as hopes 
of an imminent resolution to the current conflict led bouts of volatility in 
recent weeks.

   Spot market pricing in oil, however, reveals a better connection to the 
depth of the disruption caused to petroleum cargoes on the Strait of Hormuz, 
which used to serve 20 million bpd or 20% of world supply.

   WTI ex Houston, for instance, quadrupled its basis over futures in the first 
three weeks of the war alone before rocketing to more than $25 bbl and settling 
in the $8-$12 bbl range, compared to around $2 bbl before the war. The jump in 
reaction to Russia's 2022 invasion of Ukraine, in contrast, was much more 
muted, briefly rising by 250% before slumping back a few weeks later.

   In Europe, the basis price of a barrel of North Sea crude has since the 
start of the Iran conflict shot up from less $1 bbl to anywhere from $20 to $30 
bbl, depending on the assessment, before finding footing in the $9-$13 bbl 
range. This surge in physical crude prices was nearly four times as pronounced 
as the one sparked by the war in Europe, marking an unprecedented disconnect 
between paper barrels and real ones.

   During the first months of the war in Ukraine, global crude oil supply 
looked set to be stifled by international sanctions on Russia and a U.S.-EU 
embargo on Russian oil imports. The impact on actual physical supply, however, 
was rather limited after the initial shock, with flows being diverted from 
Europe to buyers in the Middle East, India and China. There was a small dip in 
Russian crude output, but it came at a time when Russia was already pledged to 
curbing production as part of OPEC+.

   The Hormuz crisis, in contrast to the Russia Ukraine war, has affected more 
than just short-term availability. Some 15 million bpd of crude oil and 5 
million bpd in refined product flows have been cut off the market since Iran 
instituted its blockade of the waterway in the first week of March. The lack of 
outlets amid limited options to divert flows elsewhere forced producers in the 
region to throttle output by more than half. Precautionary measures, damages to 
energy infrastructure and rapidly filling storage tanks caused around 12 to 15 
million bpd of pre-war supply to be offline this month.

   The disruption on the Hormuz, which the International Energy Agency has 
dubbed the largest in history and more impactful than the crises of the 1970s 
combined, will likely be slow to ease once exports from the Persian Gulf can 
resume. The number of available empty dirty tankers in the region is at half of 
typical levels, capping how quickly exports can return. In addition, export 
terminals and moorings have sustained damage from Iranian drone and missile 
attacks and will need repairing.

   Logistical constraints aside, regional oil production will take months to 
approach pre-war levels. The reopening of shipping lanes is a necessary, but 
insufficient condition for restoring oil supply in this current situation. The 
longer an oil well is idle, the higher the risk of requiring maintenance to 
fully restore output. More than half of production has been at a standstill 
this month, with some wells being shut since the beginning of the war. 
Prolonged shutdowns and war damages could also lead to some supply being 
permanently lost.




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