$166 a barrel? Middle East oil gives clue to where all prices could be headed if Iran war drags on
Iran Abadan (left), a crude oil tanker owned by the National Iranian Tanker Company in Dubai, United Arab Emirates.
Charles Crowell | Bloomberg | Getty Images
The extreme increase in oil prices in local markets in the Middle East may give investors an idea of where US and European prices will go if the Strait of Hormuz does not open soon.
Dubai crude oil prices hit a new record on Thursday, surpassing $166 per barrel, according to market data provider Platts. Brent futures and West Texas intermediate Cushings are trading around $100 following their historic rises.
Local oil markets are often overlooked, but are now seen as a possible harbinger of what might lie ahead if the conflict ends soon.
Current prices in Dubai and Oman reflect the severity of the shortage in the Gulf, according to Natasha Kaneva, JPMorgan’s head of commodities research. But that doesn’t mean the American market will be spared from another sharp bounce, he said.
“Unless the Strait reopens, this divergence is unlikely to persist,” Kaneva said in a note to clients this week. “Brent and WTI will ultimately reprice as Atlantic basin stocks decline and the global market is forced to rebalance from a materially tighter supply level.”
West Texas Intermediate Wood Mackenzie’s senior oil market analyst Andy Harbourne said crude oil was not seen as an ideal alternative like Oman. However, if transit through Hormuz remains stagnant, this could become a more sought-after alternative, given that buyers will become even more desperate.
Hormuz factor
The Strait of Hormuz, an important passage connecting the Persian Gulf and the sea, is where approximately one-fifth of the world’s oil transit occurs. Data analyzed by Charles Schwab shows daily transit calls have fallen to nearly zero from highs of over 120 seen earlier this year.
Crude oil prices leaving direct from Middle Eastern countries such as Dubai are rising faster than oil such as WTI, which generally does not pass through the strait in large quantities, Harbourne said.
“It all depends on the duration of Ormuz shutdown,” Harborne said. “It updates all market assumptions in real time.”
The Bosphorus is mostly used to send fuel to Asian countries such as China and India. Therefore, the increase in Dubai prices is more pronounced in the Singapore market than in London.
Analysts at energy research firm Rystad have begun tracking Dubai’s London market price instead of the Singapore level, or using so-called swap instruments. According to Rystad’s Susan Bell, the price in Singapore is basically negligible given the heavy disruption in the Asian market.
“It’s almost a fictitious price,” said Bell, the firm’s senior vice president of commodity markets. In other words, the price in the Singapore market is “a bit breezy at the moment” despite being widely followed in normal times.
Still, Harbourne said the ripple effects from Dubai oil’s jump in Singapore could be seen elsewhere. He said that the demand for Omani crude oil, which is thought to be of the same quality as Dubai but transited outside Hormuz, has increased and transit in Dubai has mostly stopped.
While the global reference of oil experienced a less sharp rise compared to Dubai and Oman, prices also experienced a significant shock. From the start of the war to Wednesday, Brent’s May contract was up more than 48%. It is up more than 76% since the beginning of the year.
Brent May contract, year-to-date
Still, Harborne of Wood Mackenzie does not expect U.S. oil to fully converge to movements in the Asian market if flows begin to normalize by the end of April. Rystad’s Bell also said that if WTI or Brent crude followed the same price as Dubai’s in Singapore, this would probably have happened already.
Bell and Harborne said there is a simpler explanation for Dubai’s premium. Given the proximity of the oil-passing Hormuz, lower shipping costs will generally be required to reach destinations in the global East. Crude oil, on the other hand, traveling thousands of miles from the U.S. to these destinations will necessitate higher delivery fees.
“The price gap between the West and Asia is sending some important signals to the market,” Harbourne said. “He’s telling the West to move oil to Asia.”
More generally, analysts said that increased oil and transportation costs as a result of the Bosphorus being closed for a long time would lead to sticker shock for consumers. In addition to drivers feeling the strain at the gas pump, rising fuel costs for trucks and ships could also be passed on to shoppers.
