Probably the best way to describe what investors think about the Iranian war is to reiterate Monday’s trading ranges: $38/bbl in WTI, $36/bbl in Brent, $52/bbl equivalent in Heating Oil, $28/bbl equivalent in RBOB, and $51/bbl equivalent in Gasoil. Trading yesterday remained equally nervous and choppy. A drop of $14/bbl from high to low, precipitated by the US energy secretary’s social media post about the US Navy escorting an oil tanker through Hormuz, was quickly reversed when the post was deleted, and the Iranian Revolutionary Guard refuted it. It is a backbreaking exercise to try to reconcile the method (if there is any) with the madness inflicted on consumers and investors over the last week, and particularly over the last two days.

It did not take aeons for the US President to make the expected U-turn. A week after the US and Israel attacked Iran, an assault that turned into a frightening regional conflict, and after a rally of 64% in Brent and 72% in Heating Oil, he claimed the war against Iran would “end very soon”, cynically calling it a “little excursion” (notwithstanding the death of 150 schoolgirls). Perhaps even more bizarrely, he observed that “we’ve already won in many ways, but we haven’t won enough”. Go figure.

Looking beyond the narrative, the Iranian regime has not been replaced; in fact, the former Supreme Leader’s son, a hard-liner, has succeeded Ali Khamenei. The Strait of Hormuz remains effectively shut (apparently), and Persian Gulf oil producers are not in a position to increase production, at least not meaningfully. In the latest development, ADNOC had to shut its Ruwais refinery because of a drone strike. Talks of additional waivers on Russian oil exports continue; however, it would beggar belief to conclude that peace is within reach. Yet what appears obvious is what has been on display every now and again over the last 14 months: the US President and his acolytes, however belligerent the rhetoric, do listen when the market speaks.
The two most apposite questions are whether the attack against Iran was necessary and inevitable, and how it will shape the global economy, the oil balance, and international relationships in the short, medium, and long term. The answers are merely guesses. If the ultimate objective is to prevent Iran from enriching uranium to weapons-grade level, which is or was most plausibly meant to be used against Israel, then military intervention is a riskier enterprise than the nuclear deal that President Trump was so eager to abandon in 2018. Before the withdrawal, Iran largely complied. Once the economic benefits vanished, the writing was on the wall. Trump’s decision to renounce the agreement sowed the seeds of a Trump attack on the Persian Gulf country eight years later.

The main beneficiary of the ongoing war is undeniably Israel. The pain imposed on its regional archenemy is enormous. Non-Gulf oil producers, including Russia, also reap the short-term benefit of swelling oil prices. The latter had been more or less successfully deprived of its petrodollars, which are critical to financing its own war against Ukraine. The Iranian conflict has provided it with an invaluable lifeline. Those who suffer most are the consuming nations and Gulf producers. The EIA cut its OPEC production estimate for 2Q by more than 2 mbpd, and its modelled assumption puts Brent above $95/bbl for the next two months, obviously subject to massive revisions, if warranted.

The US will probably quietly lose allies over the conflict. The US’s credibility as a reliable political, trade, or military partner is deteriorating by the week. The adverse economic impact is evident, as rising oil prices impede growth and raise the spectre of renewed inflationary pressures. Moreover, Gulf nations that host US troops never consented to the aggression, a direct consequence of which will most likely be the abandonment of the Abraham Accords, President Trump’s signature foreign policy achievement. To put it bluntly, promoting regional stability, trade, and cooperation might have suffered an irrevocable setback. Continuously elevated oil prices would also make renewable energy more competitive, one of the President’s main abominations.

Prolonged high oil prices will undeniably hurt oil demand, but the immediate effect, as seen in the run-up to $120/bbl, is worrisome. The backdrop will remain alarming unless the Strait of Hormuz reopens. Until then, Gulf producers, well, those who are in a position to do so, will voluntarily reduce production to avoid filling stockpiles too quickly, allowing wells to remain open for as long as possible, or as necessary. Without free passage through the Strait, refiners, whose staple feedstock is predominantly Middle Eastern crude, will be forced to cut runs and suspend product exports. An eventual attack on Iran’s pivotal export terminal on Kharg Island would exacerbate the already inflammatory situation.

The ongoing regional disruption of oil exports is being mitigated by the above-mentioned Russian waiver and by the use of alternative transport routes, such as the Saudi and UAE pipelines. Saudi crude oil exports from the Yanbu port on the Red Sea are expected to reach a record high of 2.2 mbpd in March, Reuters reports. The Kingdom usually sends 6 mbpd through Hormuz. Talks of an SPR release are intensifying, the WSJ reported this morning. The IEA proposed its largest release in history yesterday. Actual release is not imminent. Details need to be worked out and agreed upon. An objection from even one member country could cause a delay in implementing the plan. It is worth keeping in mind that should the emergency stockpiles be used to alleviate the impact of supply and output disruptions, they will have to be replenished further down the line.

Making sense of the US foreign policy is almost beyond comprehension. Regarding the latest hostility, the price pain threshold became discernible in the early hours of Monday, and whether it will be revisited depends entirely on the US’s willingness to make concessions to end the war, whether implicit or otherwise, as the new Iranian regime will continue in the footsteps of its predecessors, not shying away from confrontation. Iran does not need or want to win this war; it merely wants to make it as expensive for the US as possible. Going back to the pre-conflict price level is not imminent, but this seemingly firm and well-argued opinion might have to be turned upside down on the President’s whim. Oh, nearly forgot, the API reported drawdowns across the board last night.
 

Overnight Pricing