The chaos that has gripped the oil market looks set to deepen, with more production getting cut as the war in Iran effectively shuts the Strait of Hormuz, and the US considers widening its range of targets in the country.
The United Arab Emirates and Kuwait have already started reducing oil production as storage runs out, joining Iraq, whose output is now down 60%. Others may be forced to follow as oil tankers continue avoiding the narrow waterway, rapidly reducing the number of empty ones available for loading. Once all the vessels are loaded, the region’s remaining on-land storage will fill even quicker.
The upheaval, now in its ninth day, shows no sign of imminent resolution, meaning a strip of water that normally handles a fifth of the world’s oil is impassable. Saudi Arabia is diverting record amounts of crude to its Red Sea coast for export, helping to alleviate at least some of the pressure.
Iran has vowed not to back down in the face of US and Israeli strikes that began on Feb. 28. President Donald Trump responded on Saturday by saying the US would now consider targeting areas and groups of people in Iran that were not previously aimed for. The attacks will continue “until they surrender or, more likely, completely collapse!” he said in a social media post.
For oil analysts, executives and traders, that has meant ever-louder warnings that the war is bringing crude to a tipping point, and closer to the psychological $100-a-barrel threshold. Brent already climbed 30% last week — its biggest jump in six years, putting it just dollars from that mark.
Other markers tied closely to the region have already soared through that level. Futures tied to Abu Dhabi’s flagship Murban crude closed at $103 a barrel on Friday, while Oman crude futures were at $107. Chinese crude oil futures on the Shanghai International Energy Exchange ended, in US dollar terms, at $109.
“Every additional day of disruption adds pressure, and in that scenario there is effectively no ceiling to prices in the short term,” said Stefano Grasso, a one-time physical energy trader who’s now senior portfolio manager at Singapore-based fund 8VantEdge Pte.
Read More: Traders Warn $100 Oil Is Imminent If Iran War Keeps Raging
For one, there are growing threats to oil infrastructure — raising the risk of disruptions that could outlast attacks in the area. Saudi Arabia intercepted drones that were heading toward the 1-million-barrel-a-day Shaybah oil field over the weekend. Strikes in Bahrain and Qatar have also continued.
There is also the continued blockage of the Strait of Hormuz. Over the past days, only Iran-linked tankers and two bulk carriers, which claimed to be Chinese-owned, have been seen transiting.
The effective closure has led to Iraq’s pumping dropping to about 1.7 million to 1.8 million barrels a day, down from about 4.3 million a day pre-conflict, according to people with knowledge of the matter.
Saudi Arabia, meanwhile, is directing unprecedented amounts of crude to its Red Sea coast. Shipments from its western terminals have surged to a rate of about 2.3 million barrels a day so far this month, ship-tracking data compiled by Bloomberg show. While that’s about 50% more than the kingdom has shipped from Red Sea in any month since the end of 2016, it’s far below the 6 million a day that the country has exported from the Persian Gulf in recent months.
The US has promised to bolster financial protection and potentially provide military escorts, and announced on Friday that it would roll out maritime reinsurance for the Persian Gulf region. The facility will cover losses up to about $20 billion “on a rolling basis”, according to a statement.
For shipowners and charterers operating in the region, however, the cost of insurance is not the major concern holding up traffic. Instead, they worry about the safety of vessels and crew, and say they would need full naval escort — along the lines of Operation Prosperity Guardian, a coalition to safeguard shipping in the Red Sea — or preferably an end to hostilities.
Read More: US Offers $20 Billion Reinsurance Plan to Spur Gulf Oil Flow
Other US moves to dampen oil price increases include allowing India to access Russian oil currently held in floating storage in the region. Washington has also floated tapping its strategic petroleum reserve or even intervening in futures markets — officials have since downplayed these ideas, while Trump has brushed off inflationary worries even as US gasoline prices spike.
“This is an excursion,” he said on Saturday. “We figured oil prices would go up, which they will, they’ll also come down, they’ll come down very fast.”
Import-dependent Asia, which leans heavily on the Middle East, is feeling the most immediate pain.
In Japan — which takes over 90% of its crude from the region — refiners are asking for the option of drawing on national oil reserves. Others, including China, have curbed fuel exports to preserve supply and keep domestic prices controlled. South Korea is considering reinstating an oil price cap for the first time in 30 years, state news agency Yonhap reported on Sunday, citing government officials.
In northwest Europe, meanwhile, the price of jet fuel soared to an all-time high of $1,528 a ton — the equivalent of more than $190 a barrel — on Thursday, according to figures from General Index that go back to 2008. The impact on jet fuel is particularly sharp because half of the European Union’s imports typically pass through Hormuz.
Read More: Queues, Price Hikes and Shortages as Asia Battles Fuel Crunch
For analysts at ING Groep NV, the base case is now four weeks of disruption — two of full upheaval and two weeks of 50%, said Warren Patterson, the bank’s head of commodities strategy in Singapore.
“This scenario doesn’t necessarily mean that we see a full end to the conflict in this time period,” he said. “But if US and Israeli strikes degrade Iran’s ability to attack vessels and enforce a closure of the Strait of Hormuz, we could see flows starting to normalize.”
The bank’s most dramatic scenario is a three-month, full disruption to oil and liquefied natural gas flows. This would likely see oil prices spiking to records through the second quarter, the bank’s analysts wrote in a note.
