$166 a barrel? Middle East oil hints at where all prices could go if the Iran war drags on

The sharp rise in oil prices seen in local markets in the Middle East gives investors a glimpse of where US and European prices will go if the Strait of Hormuz is not opened soon.

Dubai crude oil prices hit a new record high above $166 a barrel on Thursday, according to market data provider Platts. Dated Brent and West Texas Intermediate Cushing are trading around the $100 mark after historic runs higher.

Local markets for oil are often overlooked, but are now seen as a possible precursor to what may happen next if the conflict does not end soon.

Current prices in Dubai and Oman reflect the severity of shortages in the Gulf, said Natasha Kaneva, head of commodities research at JPMorgan. But that doesn’t mean the American market is immune to another sharp jump, he said.

“Unless the strait reopens, this divergence is unlikely to continue,” Caneva said in a note to clients this week. “Brent and WTI will eventually get higher prices as Atlantic basin inventories draw down and the global market is forced to clear materially tight supply levels.”

West Texas Intermediate Andy Harburn, senior oil market analyst at Wood Mackenzie, said crude is not seen as an ideal substitute like Oman. If shipping through Hormuz is depressed, it may become a more sought-after alternative as buyers become more desperate.

The Strait of Hormuz, a major route connecting the Persian Gulf and the sea, carries about one-fifth of the world’s oil traffic. More than 120 daily transit calls seen earlier this year have fallen to nearly zero, Charles Schwab analyzed.

Prices for crude leaving Middle Eastern countries such as Dubai have risen faster than oil such as WTI, which normally does not go through the strait in large quantities, Harburn said.

“Everything arises as a function of the duration of the closure of Hormuz,” Harborne said. “The entire market is updating its assumptions in real time.”

The strait is commonly used for transporting fuel to Asian countries such as China and India. Because of that, the Dubai price rise is more pronounced in the Singapore market than in London.

At energy research firm Rystad, analysts have begun tracking the London market price of Dubai, or swap instruments, rather than Singapore’s level. According to Rystad’s Susan Bell, the price in Singapore can basically be ignored because of the severe disruption in the Asian market.

“It’s almost a hypothetical price,” said Bell, the firm’s senior vice president of commodity markets. In other words, the price in the Singapore market, although widely tracked in normal times, is “a bit of a pie-in-the-sky right now.”

Still, the ripple effects of Dubai oil’s jump in Singapore can already be seen elsewhere, Harburn said. He said demand for Oman crude, which is considered the same quality as Dubai but is shipped out of Hormuz, has soared with Dubai shipments largely suspended.

Although the global benchmark for oil has risen less sharply than in Dubai or Oman, prices have taken a significant shock in their own right. Since the start of the war through Wednesday, Brent’s May contract has jumped more than 48%. Year-to-date, it is up more than 76%.

Still, Harborne of Wood Mackenzie does not expect US oil to fully converge with Asian market movements if flows begin to normalize by late April. Rystad’s Bell said that if WTI or Brent crude were to go the way Dubai prices did in Singapore, it might already have happened.

There is a simple explanation for Dubai’s premium, Bell and Harburn said. Given its proximity to oil transit Hormuz, it requires lower transportation costs to get to destinations in the global east. On the other hand, crude oil that travels thousands of miles from the US to those destinations mandates higher delivery charges.

“The price gap between the West and Asia is sending some important signals to the market,” Harburn said. “It’s telling the West to move oil to Asia.”

More broadly, higher costs for oil and transportation as a result of the prolonged closure of the Straits will lead to sticker shock for consumers, analysts said. In addition to drivers feeling the strain at the gas pump, rising fuel costs for trucks and ships could also be passed on to merchants.