When tensions rise in the Middle East, it can be helpful to look at what is not happening as much as what is.
In the crude oil market, this means focusing on the fact that so far not a single barrel of crude oil supply has been lost. It is in the interests of all involved parties that this remains the case.
Crude oil prices rose again in early trade in Asia on Monday, with global benchmark Brent futures gaining 2.1% to trade at $75.76 a barrel.
This built upon the 7% leap on June 13, which saw Brent rise to the highest in nearly five months as Israel launched a series of drone and air strikes that killed several top Iranian commanders and nuclear scientists and damaged nuclear facilities.
But it’s worth noting that the reaction of physical oil prices in the Middle East was more measured than that in the paper market.
The price of Dubai swaps, which is a contract settled against physical prices of Dubai crude, rose 5.8% on June 13 to end at $71.03 a barrel.
The gain of $3.86 a barrel for Dubai swaps contrasts with the $4.87 jump for Brent contracts.
This smaller gain for physical oil is perhaps a sign that traders and refiners are slightly less concerned about a supply interruption than the paper investors in Brent.
Even though physical oil prices rose less than paper, both still had strong increases and these are a rational response to the escalating conflict, especially since it shows little sign of cooling off, with Israeli attacks and Iranian missile barrages continuing.
But for oil markets the key is whether the risks of attacks on Iran’s crude production and export infrastructure, and of Iran attempting to block the Strait of Hormuz, are realistic or imminent.
The narrow Hormuz channel between the Persian Gulf and the Gulf of Oman, and the Indian Ocean beyond that, carry about a fifth of the world’s daily oil consumption of up to 20 million barrels per day (bpd).
It is the route that OPEC members Saudi Arabia, the United Arab Emirates, Kuwait, Iraq and Iran use for the bulk of their crude and product exports, and there are few viable alternatives.
It is also the route used to export liquefied natural gas by Qatar, the world’s second-biggest shipper of the super-chilled fuel.
However, it is also worth noting that in all the past conflicts that have afflicted the Middle East, the strait has never yet been blocked, although there have been instances when Iran has boarded and detained tankers.
It could also be argued that the best option for Iran currently is to keep the market thinking about the risks to shipping through Hormuz, which keeps a premium in the oil price, while actually doing nothing to close the waterway.
HORMUZ RISKS
But what would happen should Iran seek what could be termed a nuclear option and attempt to close the waterway?
This would stop Iran from exporting any crude as well as the other countries, and would almost certainly draw in other powers to the conflict.
The United States would potentially act to keep the waterway open, and Iran would also sacrifice whatever goodwill it has among its Gulf neighbours, as well as with China, the world’s biggest crude importer and in effect the only major buyer of Iran’s sanctioned oil.
China doesn’t engage in loudspeaker diplomacy but that doesn’t mean it isn’t making its views known to both sides in the conflict, and Beijing will be keen to see a rapid de-escalation.
The United States does tend to make its views known publicly, although these are often somewhat confused given President Donald Trump’s habit of speaking off the cuff and contradicting his own senior officials.
But the message from Washington also seems fairly clear in that they will help Israel defend itself and only enter the conflict if Tehran directly attacks U.S. personnel or interests.
Israel has also limited itself to attacking only domestic Iranian energy infrastructure such as refineries and storage tanks, measures that aim to make life more difficult for Iranians but not to harm crude production and exports.
This is not to minimise the risks to crude supply in the Middle East, it is rather to recognise that even dramatic situations have in the past led to limited supply disruptions and tensions do eventually ease.
Source: Reuters