Global oil supply crisis raises pressure for war resolution
With the already significant damage to the pocketbook caused by a visit to the fuel station, it is sobering to learn many economists think there is worse to come.
The war in the Persian Gulf and the closure of the Strait of Hormuz caused crude oil to jump to around US$100 and gasoline and diesel to soar.
But high as they are, oil and fuel are not at records posted when Russia first invaded Ukraine, even though the damage to the international fuel supply is now the worst ever.
The war and Hormuz closure disrupted about 20 million barrels per day of exports.
Work-arounds in the Persian Gulf region and increased exports by the United States and others partly offset the loss, but many analysts think the world is still short 10 million barrels a day or more.
Since the United States and Israel started bombing Iran in late February, the world has had to drain the global supply chain and reserves by at least one billion barrels to keep functioning.
Several factors have so far restricted the price rally, but their ability to ameliorate might be coming to an end.
U.S. president Donald Trump regularly tries to calm energy markets with optimistic social media posts about a cease fire and negotiations to end the war, but as this column was written May 12, Iran and the U.S. are far apart on what they would accept to lead to a truce.
The vast majority of ships carrying oil, fuel and fertilizer caught north of the strait are unwilling to risk a transit because Iran still has the capability of attacking them.
At some point the market might stop believing Trump’s assurances.
The catalyst might be the collapse of the other thing that has kept oil prices in check.
Until recently, ships that left the strait just before the war were still sailing to their destination, but now they have all arrived and no more are coming.
Countries with strategic oil reserves drew heavily on them to keep refineries operating, but those reserves are running down.
Reserves of refined products such as jet fuel are approaching critical levels in many regions.
Several Asian country governments created national fuel rationing programs and airlines have started to suspend routes over concerns about the availability and price of jet fuel.
China has reduced imports during the crisis and has drawn on its reserves, but it can’t do that forever.
The U.S. has also dipped into reserves, allowing to export more to the rest of the world, but that too is a finite strategy.
An analysis from the investment bank Morgan Stanley sums up what many analysts are saying: the breaking point likely comes in June.
All the factors that temporarily limited the oil price increase start to fall apart in June and at that point the price of oil will have to rise further to ration demand.
In that event, Morgan Stanley suggests, the international benchmark, Brent Crude, would climb to a range of US$130-$150 per barrel.
Canadian analyst Eric Nuttall, partner and senior portfolio manager at Ninepoint Partners, told BNN Bloomberg on May 1 he also thinks the price will have to climb to $150 in coming weeks to curb consumption.
“This is by far the biggest energy crisis that anybody alive is experiencing,” he said.
As this crisis point approaches, the pressure increases on Trump to accept a deal. Many worry such a deal might not be better, and possibly worse, than the deal negotiated during the Obama administration, which Trump tore up during his first presidency.
Even if the strait was to open soon, it will take months to refill the global supply chain, and then demand will remain heavy as countries refill their strategic oil reserves.
The Organization of Petroleum Exporting Countries and Russia, known as OPEC+, has pledged to increase its output by 188,000 barrel a day, but its ability to meet the goal is questionable, given the damage to oil export infrastructure sustained during the war.
Also, Iran, which is not an OPEC+ member, has sustained heavy damage to its ability to export oil.
So even when Gulf exports resume, their ability to moderate oil prices will be slow.
Nuttall thinks a baseline of $80-$100 per barrel for next couple of years is likely.
Remember, many government and private financial institutions back in December forecast that oil supply would be in surplus and Brent crude would average $55-$60 in 2026.
Everything I said about oil also applies to nitrogen and phosphate fertilizer from the Persian Gulf, so that means further elevated farm input costs for the foreseeable future.
The only positive for agriculture is that high crude oil supports oilseed prices.
