The Commodities Feed: Oil Surges Above $100 Amid Middle East Disruptions

(MENAFN- ING) Oil market starts pricing in longer supply disruption

Oil prices skyrocketed this morning, with ICE Brent making easy work of $100/bbl and trading as high as $111/bbl. Over the weekend, there were no signs of de-escalation. If anything, the situation appears to be deteriorating further. In addition, upstream oil production has started to shut-in, with producers facing storage constraints. Iraq, Kuwait, and the UAE began reducing oil production. Iraq, the first to start cutting supplies last week, has reportedly reduced output by around 1.5m b/d. Meanwhile, over the weekend, Kuwait reportedly cut output by as much as 300k b/d.

The longer this goes on, the more supply we will see shut-in. This is a concern for markets. Even if flows through the Strait of Hormuz start to resume, it will take time for upstream production to ramp up. The combination of these production shut-ins and no signs of de-escalation in the war means the market is having to aggressively price in a prolonged supply disruption. The bottom line is that, as long as we don’t see oil moving through the Strait of Hormuz, oil prices will only move higher.

The International Energy Agency (IEA) said that there are no plans yet for a coordinated release of oil from government reserves. The European Union also told member states that there’s no need to tap government oil stocks yet. Clearly, pressure for such action will grow with supplies tightening and crude trading above $100/bbl. There were reports last week that the Japanese government is considering tapping its reserves, given developments in the Middle East.

The latest positioning data shows that speculators surprisingly decreased their net long in ICE Brent over the last reporting week. The managed money net long fell by 35,358 lots to 285,594 lots, driven primarily by long liquidations. Market uncertainty following US-Israeli strikes on Iran appears to have left speculators reluctant to hold too much risk. In fact, market participants have become increasingly cautious, with aggregate open interest in ICE Brent at its lowest level since December.

Refined product output from the Persian will also face similar issues. Refineries will need to start reducing run rates due to inventory buildup. However, the issue with refined products is not limited to just the Persian Gulf. Significant disruptions to crude flows mean refineries, particularly in Asia (where the bulk of Persian Gulf crude ends up), will have to reduce run rates, further tightening the refined products market. These concerns are well reflected in the movements seen in refined product cracks over the last week. In addition, if refiners are forced to reduce their run rates, there is a clear risk that they may have to buy back or at least roll forward their hedges. This only provides additional support to product cracks.

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