All shipping through the Strait of Hormuz has been halted – making reality what was long considered the worst-case scenario for energy markets. The number of empty supertankers in the Gulf is running out, hastening the moment when excess production must be cut.
While oil and gas prices have risen this week, they remain well below the highs seen following Russia’s invasion of Ukraine. There were signs on Friday that the primary oil market was shaking off some of its composure, as Brent crude rose above $90 a barrel – more than a quarter of their gains this week.
Still, executives at the four major trading houses, who spoke on condition of anonymity, said the market was still too optimistic about the potential impact of the long-term closure of the Strait of Hormuz, and predicted that prices would reach $100 a day if the war did not ease.
There are already signs of stress in physical energy markets, where a shortage of refiners in the Middle East and Asia has pushed up prices for products like diesel and jet fuel. Bob McNally, a Rapidan Energy Group consultant and former White House official, said the market is still adjusting to how long Hormuz will be shut down.
“We see Brent reaching $100 a barrel and above in the coming days and weeks, once the market recognizes that the Hormuz shutdown is a week-long event rather than a brief disruption,” he said.
Rising prices are creating a headache for US President Donald Trump, who has favored the ability to keep oil prices under control. Gasoline has never been more expensive than when he was president. The White House has made several attempts this week to calm oil markets — so far without success.
There is no quick fix
For oil and gas traders, the key question is when energy flows from the Gulf region will resume. For every day that oil doesn’t flow through Hormuz, storage tanks fill up, pushing producers closer to the point where they have to cut production. Iraq began cutting production this week while Qatar halted LNG production.
To be sure, the fate of the market depends on the course of the war, and any decision to go to war or any sign of stopping Hormuz will send oil prices down again.
But for now, there is little immediate hope that the Hormuz standoff will be resolved while the fighting continues.
On Tuesday, Trump said the United States would provide insurance guarantees and maritime guards to ensure safe passage for oil tankers and other vessels through the Strait of Hormuz.
The announcement coincided with the final day of the reporting period for position data compiled by ICE Futures Europe and the Commodity Futures Trading Commission, which showed that investors placed only long bets on both Brent and WTI to start the week.
The muted reaction reflected traders’ perception that the conflict would be a trial, a surgical operation, with a sharp increase in prices and a swift recovery, with the firm belief that the Trump administration would step in with 11th-hour policy action to curb energy prices.
“The market was not 100% built for prolonged conflict,” said Rebecca Babin, senior energy trader at CIBC Private Wealth Group.
Three days later, the ship’s three owners and people close to some allies in the region said they had yet to receive more details about Washington’s plan.
Many owners also said that insurance, which the industry says is available, remains secondary to the safety of their crew. And it is also not clear that the sea escorts will bring wholesale to the shipment.
“There are concerns across the industry that sailing in convoys will only target the backs of ships.” Halvor Ellifson, director of Fearnley Shipbrokers UK Ltd, said he started his career at the end of the tanker wars of the 1980s. “I don’t see a short-term solution, and from where I sit it’s high oil prices, inflation and economic pain.”
Meanwhile, Goldman Sachs Group Inc. Analysts said late on Friday that there were “significant upside risks” to the bank’s oil price forecast, tighter-than-expected bottlenecks in the Hormuz pipeline, Saudi Arabia’s limited capacity to move crude exports to Red Sea ports, and risks of a protracted war.
“We now think that oil prices will rise above $100 next week if no sign of a resolution emerges,” Goldman analysts including Dan Struveon and Yulia Zestkova wrote in a note to Grigsby clients. “Oil prices may require a much faster rate of decline than history suggests and simplistic models focusing only on Persian Gulf exports suggest.”
Analysts noted that the “unprecedented” supply shock is 17 times larger than the worst supply shortage in weeks since Russia’s invasion of Ukraine.
Stress symptoms
While Brent is on track for its second-biggest weekly gain on record, its rally has begun against some fuels that are highlighting warning signs for the global economy.
This week in some parts of the world, the price of diesel has increased by more than 50 percent and the price of jet fuel has exceeded 200 dollars per barrel. European natural gas has risen by nearly two-thirds.
In response to the situation, China has told its top oil companies to freeze gas and diesel exports, a move mirrored by some other Asian countries.
Key manufacturers are also starting to sound the alarm.
According to the report of the Financial Times newspaper, Qatar’s Minister of Energy has warned that if the price of oil reaches $150 per barrel.
“We believe that oil prices will continue to rise for the coming weeks if there is no change in the conflict,” said Aldo Spanger, head of energy strategy at BNP Paribas. “Filling offshore reserves could cause production shutdowns in March, extending the upside.”
Physical oil markets are also rising, a sign of demand for immediate supply.
Some barrels from the United States brought their biggest premiums since 2020 and the value of the major Norwegian grade, which usually moves in lockstep with Brent, gained more than $5 on the benchmark this week. Saudi Arabia has raised oil prices to the highest level since August 2022.
Producers in the region are trying to recycle as much as they can. Saudi Arabia ships more than a thousand kilometers of barrels across the country to its western ports.
The UAE also has the Hormuz Bypass, which exports more than 1 million barrels per day through Fujairah. However, the two bypasses together account for about a third of the 20 million barrels of oil a day that normally flow through the strait.
‘very optimistic’
Trump has so far offered relief against rising oil prices. “If they go up, they go up, but it’s more important than gas prices going up a little bit,” he said in an interview with Reuters on Thursday.
Still, his administration is taking steps to ease market pressure. It issued a general license allowing Indian refiners to displace Russian barrels that are stuck at sea due to US sanctions. While this move will ease the pressure on the Asian country’s refiners in the short term, it is a temporary solution.
The U.S. has other possible ways to lower prices — from waiving fuel-mix requirements to releasing strategic reserves. However, authorities have so far ignored the possibility of exploring strategic petroleum reserves.
“We have a full flow chart of tools to use,” National Economist Kevin Hasst said in an interview with Bloomberg Television on Friday. “But we are also very optimistic that we will be able to solve this near-term problem relatively.”
That sentiment was echoed by the International Energy Agency, a group of major energy-consuming countries, which said it did not yet see a need for a coordinated release of strategic reserves. “Our problem is one of scarcity,” said the IEA’s executive director, Fateh Birol, arguing that there is “plenty of oil” on the market.
Some countries are less relaxed. Japan is considering releasing strategic reserves – possibly only as part of a coordinated effort with other countries – news agency Kyodo reported.
With no sign of an end to hostilities or an end to Hormuz on the horizon, energy markets are on a worrisome weekend.
“On Sunday night when oil prices start trading again, if the strait is still closed, I think the increase will be very significant,” Amos Hochstein, managing partner of TWG Global and a former senior adviser to President Biden, said of Hormuz.
