Brent's rally is continuing as Strait of Hormuz flows fall and China increases oil imports. A US-Russia diesel deal covers only nine days' worth of US demand, according to FxPro analysts, so a sustained price fall would need a broader fix to supply shortages.
Oil flows through the Strait of Hormuz fell significantly in October, according to Kpler. In the seven days leading up to 10 October, average shipments stood at 10.5 million bpd, a 38% fall from the pre-war level of 17.1 million bpd.
Reuters reports higher figures. In September, an average of 18.11 million bpd passed through, compared with 18.22 million bpd over the eight weeks before the conflict in the Middle East. Exporters are alarmed by the resumption of attacks on tankers and facilities in Saudi Arabia.
US-Russia diesel deal offers limited relief
The dip in oil prices after the diesel supply deal between the US and Russia was offset by escalating tensions in the Middle East, pushing the US dollar to a new high on Monday. The USD index then retreated slightly as investors awaiting inflation data and a speech by Kevin Warsh closed out some positions.
The deal may look impressive on paper, but it will cover only nine days' worth of US demand, and deliveries will be spread out over time. A sustained fall in prices will require a systematic resolution of supply shortages and risks arising from conflicts in oil-producing countries.
China's buying adds fuel to Brent
Alongside high geopolitical risk premiums and record-high transport costs, the Brent rally is being fuelled by reports that China is increasing its oil imports. According to Bloomberg, 96 tankers capable of carrying 2 million barrels or more will arrive at Chinese ports over the next 90 days, the highest figure since the end of February.
Tanker freight costs have hit new record highs, reaching a third of the total cost of the crude.
Intervention thresholds and price swings
The analysts note that the closer WTI crude gets to $100, the more vigorous US efforts become to resolve conflicts or enforce peace. For the slightly more expensive Brent, the intervention threshold begins at around $105.
Oil supply and demand are also price-inelastic, so a 1% shift in the balance can move prices up to 10-20 percentage points. The analysts say all of this carries the risk of accelerating inflation, which in turn leads to higher bond yields and a further strengthening of the dollar.
Source: ActionForex
Trading involves risk.
Risk Disclaimer
