For a brief period yesterday, global crude oil prices went over $125 a barrel, and settled at $120. Thus, they are up by 70 per cent compared to what they traded at before the Iran war. The last time we saw crude at this level was in the summer of 2022, when tight supplies due to the Russia-Ukraine war, fears of Iran-like and US-like disruptions by Russia, possible production cuts by OPEC+ members, and price rise by Saudi Arabia, a crucial producer, wreaked havoc in the markets.
Before that, during the Great Recession and Financial Crisis of 2008, the prices had almost reached $150. With an aggressive stance shown by the US to keep the Strait of Hormuz under control, petulant Iran’s counter to not step back, and breakdown in talks between the two has raised fresh fears of crude oil@$150. It is the worst nightmare turning out to be true, even as there was some breathing space in the past two weeks.
While producers may adjust, the consumer nations will pay a heavy price for the ongoing conflict, which may derail several economies by a few years in terms of growth and macro indicators.
What is surprising is how the two main actors and protagonists in the ongoing war have contributed to the price rise, and a shoot up in risk premiums. In the first few weeks, Iran held the world as a hostage, as it targeted the Strait of Hormuz, a major supply route.
As tankers halted, and were forced to take the longer route via the Cape of Good Hope, prices surged, as did shipping and insurance costs. Later, the US, which decided that enough was enough, and intervened to sober down the prices in fact contributed more to the higher price levels.
It tried to blockade Kharg Island, the key export port for Iran’s crude, and other products, which implicitly restricted the flow of smuggled and illegal oil to several nations like China. Simultaneously, America decided to open up the Strait of Hormuz, using its warships and Navy, which somehow further choked the route, and brought
supplies to a standstill. In essence, the one who wanted to help ended up exacerbating the issue. We are back to the initial countdown. In the first week or so, crude oil shot up to $110, and now it is higher at $120.
Iran may be blamed for the former, but the US needs to take the rap for the latter.
According to an analyst quoted in a media report, “The breakdown of talks between the US and Iran, along with President (Donald) Trump reportedly rejecting Iran’s proposal for a reopening of the Strait of Hormuz, has the market losing hope for any quick resumption in oil flows.”
Several experts have consistently maintained that even if the war ends, crude oil prices will remain much higher than the pre-war levels, or around $90 a barrel. Thus, the risk premiums will remain high, higher now due to the war, and slightly-lower but high enough later due to possible disruptions.
Indeed, the quoted price of crude oil has lost some of its relevance because some consumers are paying under-the-table premiums to re-route tankers on the high seas. The official prices, which vary as per nature of oil and locations, as well as in spot and futures, remain an indicator. One is not sure about the price China is paying for Iran’s oil, and what is the price at which Russia is selling to the others. The fact is that the Russian oil, which was available at a
discount before the war, commands a huge premium. Even smuggled oil may sell at higher-than-market prices, given the risks due to the intervention of the US Navy, and Iranian missiles.
Even as producers and consumers, along with the traders, analysts, policy-makers, and experts grapple with the fast-fluctuating oil prices, there are some significant long-term trends in the making, which will impact the prices in the future once the war ends. The first is the implementation of the new production formula by the OPEC producer nations, which was to be in place now but is delayed due to the war.
This will prevent nations from over-producing, or at least aim to do so, as the limits and quotas will be under a strict formula. Thus, supplies may reduce from OPEC, which may keep prices high. As some experts contend, they may be lower than $100 but much higher than the pre-war price of $70.
One is still not sure of the impact of the UAE leaving the OPEC group, and charting its independent energy trajectory. Some indicate that the nation may get closer to the US, which may influence global production and supplies. Others hint that the UAE wants to flex its muscle in the Middle East, and show that it is more powerful than Saudi Arabia.
The dynamics between the independence of the UAE, and the new production formula of OPEC may play in unexpected ways. Couple this with America’s aggressive intention to find more buyers for its oil, especially to lure India away from Russia and other sources. Russia will wish to sell more, and so will Iran, if the war ends well.