So, Brent rallied from $96 to $113 between May 7 and May 18. Equities started weakening in the middle of last week. Bonds are being sold off, and the US 10-year yield has risen to its highest level since last February, while the 30-year yield hit 5.18%, a fresh 19-year record. Both consumer and producer prices are on an upward trajectory in the US and elsewhere. Estimates put the cost of the Iranian war at around $72 billion. That amounts to $220 per person in the US in less than three months. Annualise it, and you will find that every US citizen is out of pocket by more than $1,000. You will then not be surprised that US consumer sentiment, as measured by the University of Michigan, has fallen to its lowest level in more than 70 years.

How should these rather ominous times be handled? Announce that the mother of all strikes on Iran, scheduled for yesterday, was postponed at the last minute to give negotiations one final chance, but maintain the right to assault again. Simultaneously, temporarily lift sanctions on Russian oil exports to “ensure oil reaches the most energy-vulnerable countries”, the US Treasury Secretary claims. Last night’s attempt of the US Senate to curb the President’s war powers will unlikely clear procedural hurdles.

We have been here before. If the script of the recent past keeps repeating itself, oil prices will rebound. After all, notwithstanding claims of “Iran begging for a deal”, the market has been suffering from an oil shortage since early March. As discussed below, stocks are depleting at an alarming rate. Post-settlement, the API reported a combined 16 million bbls weekly plunge in US inventories. A move back towards $115, and perhaps higher, will force a similar reaction from the US to the one seen on Monday night. One wonders how long the intransigence on both sides will be tolerated. The comeuppance will come when bonds, equities, and oil all refuse to listen and instead demand a permanent, sustainable ceasefire. Until then, oil will remain tight, and Brent, if last month’s expiry is anything to go by, might briefly pop above $120 once again towards the end of the month.

Admirable Adaptability

At this stage, it is impossible to know whether oil prices, driven by the perpetual Iranian crisis, will rise to or above $150. It is also uncertain whether common sense will prevail and the Strait in the Persian Gulf will reopen before it is too late. Warning signs are flashing everywhere. The latest came from the head of the International Energy Agency. Fatih Birol rang the alarm bell on Monday. He said industrial oil stocks are plummeting so rapidly that only a few weeks’ worth remains at the dawn of the summer driving season in the Northern Hemisphere. In the interim, the market does what it can—it reacts to headlines and social media posts, however unsubstantiated they may be.

It feels like there is an intense race against time. Global oil stocks may fall to a critically low level. Competition for the remaining scarce barrels could become so fierce that oil prices hit fresh record highs in the foreseeable future. Yet, as observed lately, market players are comparatively nonchalant (or complacent) about what the conflict might bring. Crude oil structures, while still in more than decent backwardation, have failed to challenge the highs seen in April. Crack spreads remain healthy but are reluctant to rally further. Dated Brent commanded a premium of $35/bbl over the forward contract for the nearest week last month. Now, it is valued at only $7/bbl above it.

One explanation is the decline in demand precipitated by the persistently high cost of oil. Global oil inventories, although depleting at a rate of 3.6 mbpd (246 million bbls in total since the beginning of the war, according to the IEA’s latest monthly report), are still well above the seasonal levels of the past four years. SPR releases have also mitigated the adverse impact of the dysfunctional chokepoint. Mr Birol estimates that the emergency measure has added 2.5 mbpd of oil to the market, with US SPR stocks at 384 million bbls for the week ending May 8, 31 million bbls lower than the end-February level. Sanction waivers on the Russian oil exports are being granted by the US and the UK. Alternative regional pipelines have been put to efficient use. To a limited extent, oil is also being transported within the region by rail and truck. And, lest we forget, a growing number of vessels are transiting the Strait of Hormuz, although admittedly, traffic is not even 10% of the pre-crisis average. LSEG and Kpler data found that two Chinese VLCCs carrying 4 million barrels of crude oil exited the Strait earlier today.

Amid the ongoing uncertainty and unpredictability, however, the most significant development in securing energy supply has been the gumption and necessity to use alternative energy sources, be it coal or renewables. As the flow of oil and LNG through the Strait of Hormuz has been materially disrupted, several countries in the Far East have switched back to coal in an attempt to maintain stable electricity generation. In Japan, coal-fired generation increased by 11% in April and 18% in early May year-on-year. In South Korea, the use of this highly polluting energy resource surged by 40% last month.

Surprisingly, but understandably, China’s coal consumption remained broadly flat, thanks to the widespread use of wind and solar power. Global renewable energy consumption, however, has risen. Electric vehicle (EV) sales reportedly increased by 51% in March and April in mainland Europe; used EV sales also accelerated across the continent and in the US. The rise in renewable energy consumption has not matched that of coal; nonetheless, the Persian Gulf crisis has reignited interest and investment in several mothballed projects involving solar, wind, and battery technologies. Finally, as reported by the Financial Times, money managers have tripled their bets on soybean oil, the feedstock used to produce biodiesel, while bets on corn, an ingredient in ethanol, have reached their highest level this year, according to the Commodity Futures Trading Commission.

After Russia’s invasion of Ukraine, energy security is once again at the forefront of the minds of politicians, consumers, suppliers, and investors. At present, any alternative is seen as a more than acceptable substitute for crude oil and refined products, and the immediate winner is coal because it is readily dispatchable and widely available. The changes in renewable energy, however, are more structural, and the transition away from fossil fuels will likely accelerate in the years to come – the polar opposite of the intentions of the current US administration.

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