Review of Oil Trading Markets - 2024 - 30th Sep to 4th Oct

As oil market prices drifted lethargically lower through Monday and much of Tuesday it looked as if oil was making ready for another sleepy week.

However, at 7.30 pm Tuesday evening the oil markets entered a new phase of price volatility not seen since Russia invaded Ukraine on February the 24th 2022, when Iran fired approximately 200 ballistic missiles into Israeli airspace.

This doesn’t appear to be a tit for tat token response to Israel’s removal of leaders of Iran's tentacle groups during the previous days but one of serious intent to harm Israel’s defence systems.?

The attack was worth $3 a barrel to the upside for ICE Brent but that wasn’t the final move of the week as fear gripped the oil markets with investors and traders imaginations running wild as they considered what could happen next and particularly concerned as to how Israel would respond militarily to Iran’s attack.

Unfortunately for those who had bet on lower prices at the beginning of the week, investors and “oil tourists” (those who don’t normally buy oil in a big way but could see oil markets were about to “catch fire” and couldn’t resist buying!) piled in to buy especially after Joe Biden’s ?comments on Thursday night that?the US is discussing with Israel the possibility of Israeli strikes on Iran’s oil infrastructure.

When asked if he would support such strikes, Mr Biden said: "We're discussing that. I think that would be a little... anyway."

His off-the-cuff remarks, made as he left the White House, did not make clear Washington’s stance but that didn’t stop the oil markets finishing his sentence for him!

President Biden has previously said he would not support Israeli strikes on Iranian nuclear facilities but his half comments regarding Iran’s oil infrastructure effectively propelled ICE Brent higher by another $3 a barrel, leaving prices up by more than $6 a barrel on the week.

Some profit taking was evident on Friday night but it was in pretty light trading and the higher numbers held.

In a few short days the oil markets have cast aside the weakness and laziness of 2024 to become the most buoyant commodity on the planet, as geopolitical risks and fear drive prices ever higher.

The platform for such a price jump remains the “fear factor” with crucial questions hanging in the air with no answers, even the lifting of the Libyan oil embargo returning 700,000 barrels a day of oil to the market, a weekly increase in physical American oil stocks in tank and the ending of the dockers strike at every major American port was not enough to deflect the rush to buy oil futures as the perception the oil rich Middle East is closer to than it’s been in 40 years to becoming embroiled in all that’s going on.

Let’s consider what’s behind investors thinking and what’s caused buyers to rush in and load their trading books with oil futures seemingly at any price.

Firstly oil prices have gone from being very weak through oversupply and weakening demand all year, to being the hottest commodity in town….in just 2 days… the price bounce was tough to see coming and caught many unawares!

In a nutshell the market fears supplies from the oil rich Middle East (a region that supplies approximately 30% of the World’s oil needs) will become further embroiled in the current conflict between Israel, Iran and it’s proxies thus resulting in oil flows being slowed, reduced or even cut off.

Iran controls one of the World’s tightest shipping lanes through which all oil cargoes originating from the Middle East (including Iran’s) must pass.

The Straits of Hormuz lies between the Persian Gulf and the Gulf of Oman and supplies the only sea passage from the oil rich region to the open sea.

It is just 28 miles wide but 20 million barrels of oil pass through this waterway every day to reach the rest of the World.

Should this waterway be blocked the flow of oil to the world would be slowed forcing oil prices to move considerably higher. Friday night’s ICE Brent close of $78.14 a barrel would look very cheap indeed should normal loading and shipping operations be curtailed.

However, we should also argue as a point of balance that Iran has been defying U.S. sanctions for years and continues to export 1.7 million barrels a day of crude oil and condensate to the world (mainly to China), and whilst blockading the Straits may seem a good strategic plan to strengthen their war position in the region it would also mean their own oil flows would be slowed making such a move more akin to punching yourself in the nose.

On the other hand should Israel attack Iranian oil facilities (Iran’s Kharg Island terminal can hold 28 million barrels) and slow Iran’s oil flows OPEC+ has enough spare supply capability of around 5 million barrels per day to fill the gap although a large chunk of that would need to transit the Straits of Hormuz leaving Russia, Kazakhstan and the African alliance to replace the lost supply.?

We could speculate all day, and many are, but whilst the potential logistical nightmares and realities sitting in the pipeline continue to make grim reading, the real oil price driver this week is the fear of increasing geopolitical tensions and their possible impact on future oil flows.?

We must keep in mind, however, that in the midst of fear of supply cuts and rising prices lies a market that still remains devoid of strong consumer buying versus enough oil to go round. Any easing of tensions between the current protagonists, however, will see oil prices ease lower in a heartbeat. The situation is delicately balanced, expect the unexpected!

This week’s closing guide prices:?

ICE Brent 78.14 (+5.33)

WTI 74.38 (+5.42)

ICE gas oil 710.75 (+42.50)

Euro Mogas swaps 717.50 (+26.00)

Euro naphtha swaps 675.00 (+39.75)

Nymex gasoline 2.0958 (+12.35 cents/ gallon)

LPG swaps 626.50 (+49.50)

Opec basket 74.90

Credit - Robert Haynes - Silvergreen Energy Ltd.