Oil executives now expect the U.S.-Iran war to drag on for years rather than weeks, with little hope of a quick political settlement. Brent and WTI have both climbed back above $100 a barrel, but physical markets are even tighter than futures prices suggest, as tanker rates, insurance costs and premiums for alternative crude keep rising.
No quick end in sight
Reuters' Clyde Russell reported this week that the mood at this year's Asia Pacific Petroleum Conference was far from cheerful. According to Reuters: "a war of egos" is how the columnist described a standoff in which neither the U.S. president nor Iran's leadership will settle for anything short of an ostensible victory.
One APPEC delegate told Russell a political settlement would need regime change in either Washington or Tehran, adding that a change in Washington looked more likely. However, a Democratic win at the November midterms would not itself amount to regime change. As a result, the war looks likely to stretch into next year and possibly beyond, delegates at the conference suggested.
Physical markets tighter than futures show
Brent and WTI are both trading above $100 per barrel, but futures prices alone understate the squeeze, since physical deliveries often cost considerably more. Russia's ESPO blend has surged to a premium of about $20 per barrel over Brent, as Chinese independent refiners run low on alternatives while a U.S. naval blockade on Iranian ports and competition for Venezuelan crude oil close off two other supply channels.
Tanker rates, meanwhile, have hit an all-time high this month as shippers reroute around escalating risks in the Middle East. The benchmark rate to ship crude from the Middle East to China on a very large crude carrier has hit a record near $800,000. The freight rate from the Persian Gulf to North Asia has jumped to $30 a barrel, up from $6 a barrel before the war. Insurance costs have climbed to $2.50 a barrel from $0.05 a barrel.
Refiners can't keep up with the fuel crunch
The squeeze on fuels is worse than on crude itself. Refiners are running at higher than normal rates to offset lost production from the Middle East and Russia, but Vitol chief executive Russell Hardy said at APPEC that global refining capacity still isn't enough to prevent draws on fuel stockpiles.
When the U.S. and Israel first struck Iran, many expected the conflict to last a week or a month. Instead, Iran followed through on its threat to close the Strait of Hormuz, and there has been no sign yet of President Trump posting about a resumption of negotiations.
Source: Oilprice.com
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