100 Days of War: How the US-Iran Conflict Has Changed Energy

One hundred days ago, on 28 February, the US and Israel launched joint military operations against Iran.

The rest, as they say, is history. Destruction, death and unprecedented disruptions to the global energy market have followed, and the conflict still shows no sign of slowing.

Central to this story, particularly when it comes to energy, has been the closure of the Strait of Hormuz. This narrow waterway – about 21 miles wide – off the southern coast of Iran, has been effectively closed since the war began in the dying days of winter.

Ordinarily, around 20% of the world’s oil and gas shipments pass through the strait. 

Since late February, though, logistics companies and insurance firms have been extremely hesitant to pass through it, meaning that a fifth of the global economy’s fuel has been largely stranded in the Gulf.

In the months since, governments and markets have scrambled to respond, with emergency stock releases, frantic diplomacy, naval escorts and wildly swinging oil prices all becoming part of day-to-day life.

But with no resolution in sight, many analysts worry that the worst is yet to come.

Supply and demand

John Evans, Analyst at PVM Oil Associates, has been tracking the situation in the Middle East closely.

"The IEA is becoming more vociferous about the state of oil stocks," he says, pointing to comments from Toril Bosoni, Head of the International Energy Agency’s Oil Industry & Markets division, who said last week that global reserves could hit “critical levels or historical low levels” by the summer.

Toni also indicated that half of the IEA’s emergency release of 400 million barrels of oil is still yet to hit the market.

That implies that 200 million barrels have already been consumed since March – a rate of depletion that, if sustained, would exhaust the remaining stockpile by the end of July.

After that, any further relief would require a fresh call on the strategic petroleum reserves of OECD member countries, a prospect that grows more politically fraught with each passing week.

"With two major wars concurrent with other fields of geopolitical stress, one wonders if any country, particularly the biggest contributor of oil stock relief, the US, will be willing to denude themselves of further reserves," John adds.

Prices, politics and the Trump factor

Despite the severity of the situation, oil prices have not yet reflected the full weight of the supply disruption. According to experts, the reasons for that are largely political.

Hopes of a diplomatic resolution, repeatedly stoked by the Trump administration, have so far been enough to keep markets from fully pricing in a prolonged closure of Hormuz.

John, however, is sceptical about whether this can last.

“There is a victory here, albeit caveated against a ticking clock,” he says.

“It belongs to the narrative of the Trump administration, and despite whatever off-ramp is missed and the next one assured to bring hope, oil prices remain intent on keeping faith with the idea that an unlikely agreement is all but done in name only.”

In the major futures contracts (agreements to buy or sell an asset at a predetermined price on a specific future date), last week's price movements illustrated just how uncertain the picture remains.

Gasoil was the biggest mover, rising 5%, while RBOB Gasoline fell 2.5% despite an approaching summer that would ordinarily tighten supply.

Brent crude, the principal global benchmark, managed only a 1% gain.

Barrel prices could hit US$150, Exxon says

Other energy insiders remain unconvinced the calm can hold.

Neil Chapman, Senior Vice President at the world’s second largest oil company ExxonMobil, offers one of the starkest assessments of what lies ahead.

Neil worries that once inventories reach critically low levels, the price shock could be sudden and severe.

“You can debate whether that's going to hit, those really low [oil stock] levels, in two weeks or three weeks,” he says. “Once you get to that point, then you'll see prices shoot up. The price of physical Brent oil cargoes will spike to US$150 to US$160 per barrel.”

If that should come to pass, the price of a barrel of oil will be around US$90 higher than it was before the war began.

The role of China

One factor complicating the picture is China, whose behaviour in the oil market has become an important variable in the equation.

According to shipping analytics firm Kpler, China's crude imports fell by two million barrels per day in May compared to April, reaching levels not seen since 2016.

John is careful to distinguish this from structural demand destruction.

“If we accept that China will buy oil when it is cheap, then it will curb its enthusiasm when barrels are being bartered at or around US$100 per barrel,” he says. “This, then, is not demand destruction per se, it is strategic wisdom.”

China's willingness to absorb cheap crude at scale was, by many accounts, what prevented oil prices from collapsing into the US$50 range during the sustained inventory builds of last year.

Its withdrawal from the market at higher price levels removes one of the key cushions that producers had been relying upon.

No end in sight

One hundred days in, there is still little to suggest that a swift resolution to the war and to the closure of the strait is on the horizon.

Despite the Trump administration’s daily briefings on the state of play, the President and his cabinet remain bullish about their intention to do a deal on their own terms, rather than Iran’s.

For John, things actually appear further from a solution than at any point since the conflict began.

"Hormuz remains closed, and if suddenly opened tomorrow, will take up to a year to revert to normalcy," he says, underlining the long-term afterglow this crisis will have.

The trajectory of oil prices may have flattened for now, but the structural risks have not gone away.

With emergency stockpiles running low, Chinese demand unpredictable and summer travel about to peak, the conditions for a sharp price move are assembling.

“The dangers of US$150 per barrel Brent are still present,” John explains. “What we would ask is: if we accept US$100 Brent as being the strike, where would you bargain on where the next US$50 per barrel might be?”