The flow of oil through the Strait of Hormuz has returned to something close to pre-war levels. So why has the price surged again to near six-month highs?
After trading below $US100 a barrel last month, the price climbed to just under $US117 a barrel last week, with pricing in the futures market suggesting it could still be trading above $US100 a barrel well into next year.
That’s despite shipments from the Middle East running close to their pre-war levels as the volume of oil on tankers being escorted through the strait by the US navy – and some tankers that appear to be paying Iranian fees for safe passage – have rebounded.
Flows through Saudi Arabia’s pipeline to the Red Sea have also picked up, despite Houthi attacks on the pipeline and the port of Yanbu.
Last week the UK’s Maritime Trade Operations Centre (UKMTO) reported 11 confirmed attacks in the strait last week. However, the real number is probably higher given the UKMTO says most targeted ships don’t report the attacks. Other authorities claim there have been at least 28 incidents so far this month.
If the oil is flowing, why has the price taken off again?
Part of the explanation may be that while more oil might be reaching the global market, the cost of getting it there has exploded.
The cost of chartering a tanker to carry oil through the strait is about 12 times what it was pre-war; the cost of insuring the cargo more than three times what it was.
Ship captains are being paid nearly six times what they were being paid, plus bonuses in the tens of thousands of dollars, and crews two or three times their pre-war salaries, as incentives for taking the risk of being attacked.
The way oil is being moved out of the strait – vessels are shuttling into and out of it and transferring their cargoes to other ships waiting outside the strait – adds to the cost and time and has created a global shortage, not of ships, but of tanker capacity because of the extra vessels tied up in the Middle East trade.
The other dimension to the spike in prices is Donald Trump.
Trump stopped attacking Iran in late July in the hope it would take some of the heat out of the oil prices, and US gasoline and diesel prices, in the lead up to the US midterm elections.
He has subsequently convinced the G7 to release strategic reserves of diesel, allowed tax-exempt diesel in the US (normally reserved for off-road usages) to be used on public roads, and controversially (and probably illegally) lifted sanctions on Russia and struck a deal with Vladimir Putin to import Russian diesel to the US.
While none of those attempts to lower US domestic gasoline and diesel prices have had any material effect – gasoline prices are still 40 per cent higher than a year ago, diesel prices about 74 per cent higher and Trump’s poll numbers have plumbed new lows – Trump has maintained the moratorium on attacks.
With the elections just over a week away, Trump’s rhetoric has hardened. On Thursday, he told reporters in Maryland that “something one way or the other” would happen “fairly soon” with Iran. Then on Sunday, he said it was “getting to be decision time” on whether to strike a deal with Iran or re-start the attacks.
“I have a decision to make. Do I finish it off, which would be very easy to do, or do I make a deal?” he said on Fox News.
“That’s all. We don’t play games.”
The US has been moving diplomats and military staff out of the region and sending more military resources to the Middle East in preparation for an escalation of hostilities.
The Iranians have vowed to retaliate if the US does resume its attacks.
“Last time you wanted to ‘finish the job’ Iran emerged even stronger,” its foreign affairs minister Abbas Araghchi posted on social media.
“Want to try your luck again? Be our guest. But be careful; we have unfinished jobs, too.”
‘I have a decision to make. Do I finish it off, which would be very easy to do, or do I make a deal?’
Donald Trump on Fox News
It’s that prospect of renewed conflict that seems to be the major influence over the surge in oil prices.
There are, broadly, two markets that price oil. One is the futures market, which prices oil for delivery at some point in future, and the other, “Dated Brent”, is for physical delivery in the near term.
Dated Brent, which normally trades at a relatively modest premium of less than $US2 a barrel to the futures price, was trading around $US125 a barrel late last week. That might suggest a sudden urgency from buyers to get their hands on oil before a new round of violence erupts.
The futures prices, in turn, might be surging in anticipation of the disruption that a renewed conflict will have on supply from the Middle East.
Whatever the explanation, it would appear traders believe there is both a significant probability the war will flare up again and flows through the strait and through the Saudi pipeline could be materially impacted despite Trump’s confidence that he can “finish it off” quickly.
He has, of course, expressed similar confidence since the US and Israel launched their attacks on February 28. Nearly eight months later, you’d have to say that confidence was misplaced.
The other dimension to the conflict and its impact on gasoline/petrol and diesel prices is that there has been significant damage to Middle Eastern oil refineries, while Ukraine’s very successful targeting of Russia’s refineries has also taken significant Russian supply out of the global market.
Even if flows of oil from the Middle East could be sustained through renewed hostilities, flows of refined products will continue to be less than what they were before the two wars.
No-one pumps crude oil into their cars or trucks, so the impact of the conflict where it hurts US and other consumers and companies will persist for some time beyond the end of the war, whenever – if ever – it ends.
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