WEAK PHYSICAL MARKET
Thankfully, the physical oil market entered the crisis weak in terms of pricing pressure. For months supply has run ahead of demand, allowing inventories to slowly refill, albeit from a low level. Now the industry is heading into a couple of months of weak demand as the northern hemisphere emerges from winter.
For the last two years, China, the biggest buyer of Middle Eastern crude, has been building a massive strategic petroleum reserve, which could limit the wider market disruption. Iranian oil is sold almost exclusively to Chinese refineries. If needed, Western nations can tap their reserves as well.
And while the physical market has been weak, the financial oil market has been bullish, snapping up oil in the expectation of rising prices. A year ago, Israel and America’s 12-Day War on Iran wrongfooted many traders, triggering a wave of buying that caused crude prices to leap. This time, the number of bullish positions is at one of the highest levels over the past 10 years. As such, oil traders are better prepared to digest the crisis.
The OPEC+ oil cartel can help cushion some of the impact, but more with words than barrels. On Sunday, the group announced a production increase for April, and hinted more to come. Still, unless the Strait of Hormuz fully reopens, all the incremental barrels will be trapped. Saudi Arabia and the UAE have pipelines that let them bypass the strait, partly anyway. If the conflict intensifies, they will highlight that alternative.
One of the world’s chief oil bulls, of course, resides in the Kremlin. Vladimir Putin will benefit from the war via loftier oil prices and greater demand for his own sanctioned crude. Barely hiding his glee, Russia envoy Kirill Dmitriev posted on social media on Saturday: “US$100+ a barrel soon.” He may be a tad too bullish, but directionally he’s not wrong.
Perhaps more important, Russia may find it easier to sell in the black market the millions of barrels of oil it has sitting in storage. If the White House turns a blind eye, India may buy them. That is hardly ideal for anyone trying to counter Putin’s belligerence, but it would ease any global crude shortage linked to the Strait of Hormuz.