Crude oil has not surged since Iran’s withdrawal of troops. Analyst: This situation may exceed US$100

Since the beginning of this year, international oil prices have risen by more than 20%. In addition to production cuts by the Organization of Petroleum Producing Countries (OPEC+), geopolitical factors have also become disruptive factors on the supply side.

After Iran launched a military attack on Israel last weekend, the market reaction in Asia was relatively mild in early trading on Monday. Global crude oil futures briefly surged and then fell back. As of press time, the front-month Brent crude oil contract fell nearly 0.2% to US$90.22/ bucket.

Tamas Varga, senior market analyst at crude oil broker PVM Oil Associates, said in an interview with China Business News that regardless of the initial market reaction, unless supply in the region is severely disrupted, the impact is likely to be short-lived, “Consider Judging from Israel’s current attitude in Gaza, there are still variables in how to respond to Iran’s attacks, and the geopolitical premium is still in the rumor rather than fact stage.”

The situation in the Middle East exacerbates supply-side risks

According to CCTV News, Iran’s Islamic Revolutionary Guard Corps launched dozens of missiles and drones at Israeli targets on the 14th. Iran’s Permanent Mission to the United Nations subsequently posted on social media that the attack on Israel can be considered “over.” . The United Nations Security Council held an emergency meeting on Iran’s attack on Israel that day. In his speech, United Nations Secretary-General Guterres urged all parties to exercise maximum restraint.

Opposition leader Benny Gantz, one of three members of Israel’s war cabinet, said in a video statement that Israel must strengthen “strategic alliances and regional cooperation” to defend against Iranian attacks. Gantz said: “This matter is not over yet. The strategic alliance and regional cooperation system that we have established and withstood major tests now need to be strengthened. In the face of the threat from Iran, Israel will establish a regional alliance in an appropriate manner and time. Demand a price from Iran.”

CCTV News quoted local Israeli media reports as saying that after several hours of discussion, Israel’s war cabinet has not yet decided how and when to respond to Iran’s missile and drone attacks. Officials have suspended discussions for now and the meeting is expected to reconvene shortly.

Since the beginning of this year, as tensions in the Middle East have intensified, the world’s two major energy futures, WTI crude oil and Brent crude oil, have risen by more than 20%, both hitting their highest levels since October last year.

Varga told China Business News that the rise in oil prices since this month is closely related to geopolitical risks. After the attack on Iran’s diplomatic residence in Syria, Israel has stepped up preparations for potential retaliation, and current oil prices also reflect a “geopolitical risk premium.”

Varga believes that pressure on the inventory side has amplified supply-side risks. Combined with the inventory levels of the U.S. Energy Information Administration (EIA), Northwest Europe and Singapore, global crude oil product inventories are currently at the low end of the historical range, all below five-year lows and may continue to decline. At the same time, under the threat of Ukrainian drones, the prospects for Russian production and exports are getting worse and worse. About 900,000 barrels/day of fuel production has been offline, and Russia is even preparing to seek help from Kazakhstan.

It is worth noting that the supply side also faces other uncertainties in the short term. Carsten Fritsch, commodities strategist at Commerzbank, believes that the reduction in Mexican exports will particularly affect the supply of raw oil to U.S. refineries. On the other hand, heavy crude oil supply is likely to tighten significantly as U.S. measures to ease sanctions on Venezuela are also set to expire in the middle of this month. “If U.S. refineries have to cut back on processing, that could result in less petroleum products available for export,” he said.

The Strait of Hormuz may become the key

Iran is OPEC’s third-largest oil producer, after Saudi Arabia and Russia, with an oil output of approximately 3 million barrels per day.

Jay Hatfield, CEO of Infrastructure Capital Advisors, believes that the most likely scenario is that there will be no immediate disruption to Iranian supplies, which should relieve some pressure on the oil market. “Typically, a 1 million barrel change results in a $5 move. So if all production in Iran is disrupted, oil prices could rise by $15,” he added.

Security in the Strait of Hormuz is seen as critical. According to data from the U.S. EIA, this maritime channel between the Persian Gulf and the Gulf of Oman is the world’s most important oil transportation route. In the first half of 2023, its oil flows averaged 21 million barrels per day, accounting for approximately 21% of global petroleum liquids consumption.

Manish Raj, managing director of Velandera Energy Partners, said: “Iran’s secret weapon is its ability to block the Strait of Hormuz.” He believes that the current situation has justified the market price of $90 per barrel. .

In the derivatives market, investors continue to bet on rising oil prices. The latest data from the Intercontinental Exchange (ICE) showed that speculative net long positions in Brent crude oil futures increased by 4,100 contracts to 303,935 contracts last week. The U.S. Commodity Futures Trading Commission (CFTC) said speculators’ net long positions in WTI crude oil increased by 8,666 contracts to 238,150 contracts last week, a six-month high.

The market’s concerns are not unreasonable. OPEC+, an alliance of oil-producing countries, maintained the existing production reduction policy at this month’s joint ministerial monitoring committee. At the same time, the recovery of demand in major economies including Asia and the United States has made the relationship between supply and demand even more tense. According to data from LSEG Oil Research, Asian imports in March were 27.33 million barrels per day, higher than February’s 26.68 million barrels per day, the highest since June last year.

Nowadays, the price of domestic refined oil products in the United States is quietly rising, currently hovering at a high of US$3.5 in the past six months. Forecasts from the American Automobile Association (AAA) take into account increased summer travel demand, falling fuel inventories and multiple issues facing refineries around the world. Gas prices this summer are expected to climb to their highest level since the summer of 2022, reaching $4 a gallon. Bank of America issued a report stating that the improvement in demand is enough to cause a supply deficit in the second and third quarters of 2024, with the gap expected to be about 450,000 barrels per day.

Varga said that if the situation in the Middle East worsens further and spills over to the export side, the risk of crude oil hitting $100 will increase significantly. “In the short term, the current oil price around US$90 will be in a delicate balance, and a significant breakthrough will face more resistance factors.” He analyzed, “First of all, OPEC+ retains a large amount of idle production capacity. If oil prices continue to rise, it may push various countries to The production reduction plan will be adjusted in June, thereby breaking the marginal balance of the market. Secondly, the resurgence of inflation may trigger feedback from the central bank’s monetary policy, thus suppressing demand and the economy. The last factor is the U.S. election. The Biden administration will certainly not be interested in domestic energy as it seeks re-election. Prices sit back and watch.”