| Commoditiy | Price | Weekly Change | 50day-Ave | 100day-Ave | 200day-Ave |
|---|---|---|---|---|---|
| Brent ($/b) | 72.48 | -5.42 | 96.49 | 93.54 | 78.82 |
| US WTI ($/b) | 69.98 | -4.84 | 91.49 | 88.26 | 74.17 |
| ICE Gasoil ($/MT) | 896.75 | 18.00 | 1,096.22 | 1,084.27 | 882.03 |
| Jet CIF NWE ($/MT) | 937.89 | 15.45 | 1,201.09 | 1,229.78 | 974.20 |
Over the weekend there were renewed hostilities between the US and Iran, breaching the ceasefire.
Brent traded close to 71 \$/b on Friday afternoon, a new low since before the war started as progress in talks between Iran and the US led to the most significant flow of traffic through the Strait of Hormuz since the war began. That movement was then interrupted again after a container ship was hit by a drone on Thursday which prompted the International Maritime Organisation to abandon its operation to evacuate trapped vessels. Iran declared on Wednesday that all vessels should coordinate with Iran and use designated routes to pass through the Strait and appears to have attacked the container vessel to underline that point. The US response did not come until Friday evening and Trump warned “There may come a point when we are no longer able to be reasonable”. The timing of this response was interesting, perhaps this delay was deliberately to get the US action and any Iranian response out of the way during the weekend, without upsetting the oil market. Iran responded with attacks on Kuwait and Bahrain. Oman announced last week that there are 80 mines in the shipping route which is normally used to pass through the Strait. Fighting also continued in Lebanon, contrary to the terms of the MoU.
Given the latest conflict highlights the fragility of the ceasefire, Brent remains in the low 70 \$/b range, is the market becoming complacent. The MoU does open the way to a resumption of normal levels of energy supplies from the Gulf and as we discussed last week, the market could be materially oversupplied if that happens. The market does need this for a period to rebuild inventories and strategic reserves, but that won’t support prices indefinitely, so there is a justification for lower prices in the future. The surprising thing how short-dated prices are so weak given that supplies are currently tight and inventories are still falling, in the US for example. The front Brent contract is around 72 \$/b this morning which is for August delivery, contracts for September and October deliveries are higher, closer to 73 \$/b. The Dated Brent price for short term physical cargoes is lower still, so the whole of the front end of the forward curve is now upward sloping which typically incentivises storage, even through oil in storage is falling. Further out along the curve it slopes downward again to disincentivise storage even though that is a time when the oil market could be expected to be in a surplus, so the forward curve has the opposite shape to what you might expect. The shape of the curve could be explained by the potential for the large volume tankers currently held in the Persian Gulf to be released into world markets quite suddenly. We do know from exchange data that there has been a lot of speculative selling of oil, and this could be contributing to the market being oversold given the uncertainties that still exist. There are growing problems for Russia which is having increasing problems supplying its domestic demand with refined products due to the effectiveness of Ukraine’s attacks and there are reports it is even considering imports.
The fact that hostilities have flared up again shows that despite the signing of the MoU and the 60-day window during which shipping was supposed to have been normalised, significant risks remain and this is going to make the shipping and insurance industry wary. It has also shown that Iran is going to stick to its demands for influence over the Strait, which could continue to present a challenge to reaching a final agreement, on top of the Lebanon question and the details of the nuclear agreement. There is therefore a risk that oil markets are becoming complacent and prices could rise again.
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