(Bloomberg) — One week into one of the biggest disruptions to global energy markets, oil prices still remain well below levels seen in previous crises. But a growing chorus of energy executives and traders are warning that every day the war rages brings the world closer to tipping point — with several predicting $100 oil within days.
Shipping through the Strait of Hormuz has come to a near standstill, making what was long considered a worst-case scenario for energy markets a reality. The number of empty supertankers in the Persian Gulf is running out, hastening the moment when further output will have to be cut.
While oil and gas prices have risen sharply this week, they remain well below the highs seen just after Russia’s invasion of Ukraine. There were signs on Friday that some of the initial lull in the oil market is fading as Brent crude prices soared above $90 a barrel – up more than a quarter this week.
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Still, executives at the four major trading houses, who did not want to be identified, said the market was still too complacent about the likely impact of a prolonged closure of the Strait of Hormuz, predicting that prices could reach $100 within days unless there is some easing of hostilities.
There are already signs of stress in physical energy markets, where refinery cuts in the Middle East and Asia have sent prices of products such as diesel and jet fuel soaring. Bob McNally, president of consulting firm Rapidan Energy Group and a former White House official, said the market was still adjusting to how long Hormuz could be shut down.
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“We see Brent reaching $100 a barrel and above in the coming days to weeks as the market accepts that the Hormuz closure is a weekly event rather than a short interruption,” he said.
Rising prices are causing headaches for US President Donald Trump, who has touted his ability to keep fuel prices under control. Gasoline has never been more expensive than at any time during his presidency. The White House has tried several times this week to calm oil markets — so far to no avail.
No quick fix
A key question for oil and gas traders is when the flow of energy from the Persian Gulf region might resume. Every day that oil does not flow from Hormuz, the reservoirs fill up, bringing producers closer to the point where they must cut production. Iraq began cutting production this week, while Qatar stopped producing LNG.
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To be sure, the fate of the market depends on the trajectory of the conflict, and any resolution to the fighting or any hint of an unblocking of Hormuz would send oil prices crashing again.
But at the moment, there is little immediate hope that the Strait of Hormuz could be repaired as the war rages on.
On Tuesday, Trump said the US would provide insurance guarantees and a naval escort to ensure the safe passage of oil tankers and other vessels through Hormuz.
The announcement coincided with the last day of the reporting period for position data compiled by ICE Futures Europe and the Commodity Futures Trading Commission, which showed investors had only trimmed long bets on both Brent and WTI to start the week.
The muted bullish reaction reflected traders’ assumption that the conflict would be a closed surgical operation that would prompt a sharp rise in prices followed by a quick retracement, along with a stubborn belief that the Trump administration would make an 11th-hour policy move to curb energy prices.
“The market was not 100% prepared for a long-term conflict,” said Rebecca Babin, senior energy trader at CIBC Private Wealth Group.
Three days later, three ship owners and people close to some allied countries in the region said they had yet to receive any details of Washington’s plan.
Several owners also reported that the insurance available, according to the industry, comes second to the safety of their crews. And it’s not even clear that naval escort will bring about a mass return to transits.
“There is concern throughout the industry that convoy passage will just be a target on the backs of ships,” said Halvor Ellefsen, director of Fearnley’s Shipbrokers UK Ltd., who began his career at the end of the tanker war in the 1980s. “I don’t see a short-term solution, and from where I sit, that means higher oil prices, inflation and economic pain.”
Meanwhile, analysts at Goldman Sachs Group Inc. said late Friday that the bank’s oil price forecasts presented “major pro-inflationary risks”, citing tighter-than-expected curbs on Hormuz shipping, limited Saudi capacity to move oil exports to Red Sea ports and risks of prolonged conflict.
“We now think oil prices are likely to break above $100 next week if there are no signs of a resolution by then,” Goldman analysts including Daan Struyven and Julia Zhestkova Grigsby wrote in a note to clients. “Oil prices may have to reach destruction levels even faster than history and simple models focused on Gulf exports suggest.”
Analysts noted that the “unprecedented” supply shock is 17 times greater than the worst supply cuts experienced by Russia in the weeks following the invasion of Ukraine.
Signs of stress
While Brent is on track for its second biggest weekly gain on record, its rally pales in comparison to some of the fuels that are warning signs for the global economy.
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Diesel rose more than 50% for the week and jet fuel topped $200 a barrel in some parts of the world this week. European natural gas increased by almost two-thirds.
In response to the situation, China told its top refiners to stop exporting gasoline and diesel, a move echoed by some other Asian countries.
Key producers are also starting to sound the alarm.
Qatar’s energy minister warned on Friday that the price of oil could reach $150 a barrel if the conflict is not resolved soon, according to the Financial Times.
“We believe that if nothing changes in the conflict, oil prices will continue to rise,” said Aldo Spanjer, head of energy strategy at BNP Paribas. “Onshore replenishment could lead to production shutdowns until March, adding to growth.”
Physical oil markets are also surging, indicating demand for immediate supply.
Some US barrels are hitting their biggest premiums since 2020, and the benchmark Norwegian benchmark, which normally trades almost closely with Brent, rose more than $5 on the benchmark this week. Saudi Arabia just raised oil prices by the most since August 2022.
Manufacturers in the region are trying to redirect their flows as much as they can. Saudi Arabia ships barrels more than 1,000 kilometers across the country to its western ports.
The UAE also has the Hormuz bypass, from which more than 1 million barrels a day are exported via Fujairah. But the two bypasses together account for about a third of the 20 million barrels of oil a day that flow through the strait in normal times.
“Very optimistic”
For now, Trump predicts calm in the face of rising oil prices. “If they go up, they go up, but that’s much more important than gas prices going up a little bit,” he told Reuters in an interview on Thursday.
Still, his administration is taking steps to try to ease market pressure. It has issued a general license that allows Indian refiners to dump Russian barrels stuck at sea due to US sanctions. While the move will ease pressure on the Asian country’s refineries in the short term, it is a temporary solution.
The U.S. has other possible ways to moderate prices, from dropping fuel blending requirements to releasing strategic stockpiles. Still, officials have so far downplayed the prospect of using the strategic oil reserve.
“We have a whole flow chart of tools that we can use,” National Economic Director Kevin Hassett said in an interview with Bloomberg TV on Friday. “But we are also very optimistic that we will be able to resolve this short-term problem relatively quickly.”
This balance was confirmed by the International Energy Agency, a group of major consumer countries, which said it did not yet see a need for a coordinated release of strategic reserves. “Our problem is a dislocation problem,” said Fatih Birol, the IEA’s executive director, arguing that there is “a lot of oil” on the market.
Some countries are less relaxed. Japan is considering releasing strategic stocks – potentially on its own rather than as part of a coordinated effort with other countries – the Kyodo news agency reported.
With no sign of an end to hostilities or an unblocking of Hormuz on the horizon, energy markets are set for a worrisome weekend.
“On Sunday night, when oil prices start trading again, if the straits are still closed, I think the increase will be much more significant,” Amos Hochstein, managing partner at TWG Global and a former senior adviser to President Biden, said of Hormuz.
–With assistance from Sherry Su, Fiona MacDonald, Salma El Wardana, Julian Lee, Yongchang Chin, Weilun Soon, Alfred Cang, Anthony Di Paola, and Jonathan Ferra.
