Oil shipments through the Strait of Hormuz have recovered close to pre-war volumes, yet prices have surged again. After trading below $US100 a barrel last month, crude climbed to just under $US117 last week. Futures pricing suggests it could stay above $US100 well into next year.
More oil is reaching the market. US Navy escorts of tankers through the strait have rebounded, some tankers appear to be paying Iranian fees for passage, and flows through Saudi Arabia’s pipeline to the Red Sea have picked up despite Houthi attacks on the pipeline and the port of Yanbu. Those flows have held up even as Iranian attacks on ships in the strait and Houthi strikes on Saudi infrastructure, oil fields and King Khalid International Airport in Riyadh have escalated.
The UK’s Maritime Trade Operations Centre reported 11 confirmed attacks in the strait last week and said most targeted ships do not report incidents, so the real number is probably higher. Other authorities claim at least 28 incidents so far this month.
Moving that oil has become far more expensive. Chartering a tanker through the strait costs about 12 times the pre-war rate, and insuring the cargo costs more than three times as much. Captains are paid nearly six times their former pay, plus bonuses in the tens of thousands of dollars, and crews earn two or three times their pre-war salaries. Ships shuttle into and out of the strait and transfer cargoes to vessels waiting outside, tying up extra tanker capacity in the Middle East trade and creating a shortage of usable capacity.
Donald Trump is the other driver of the price jump. He stopped attacking Iran in late July, hoping to ease oil and US gasoline and diesel prices before the US midterm elections, now just over a week away. He has since pressed the G7 to release strategic diesel reserves, allowed normally tax-exempt off-road diesel to be used on US public roads, lifted sanctions on Russia and struck a deal with Vladimir Putin to import Russian diesel. None of those steps has materially lowered US pump prices. Gasoline is still 40 per cent higher than a year ago and diesel about 74 per cent higher, and Trump’s poll numbers have reached new lows. He has nevertheless kept the moratorium on attacks.
His language has hardened. On Thursday he told reporters that “something one way or the other” would happen “fairly soon” with Iran. On Sunday he said it was “getting to be decision time” on a deal or a resumption of attacks. On Fox News he said: “I have a decision to make. Do I finish it off, which would be very easy to do, or do I make a deal?” He added: “That’s all. We don’t play games.”
The United States has been moving diplomats and military staff out of the region and sending more military resources to the Middle East. Iran has vowed to retaliate if attacks resume. Foreign Minister Abbas Araghchi wrote on social media: “Last time you wanted to ‘finish the job’ Iran emerged even stronger.” He added: “Want to try your luck again? Be our guest. But be careful; we have unfinished jobs, too.”
Traders appear to be pricing a significant chance that the war flares up again and that flows through the strait and the Saudi pipeline could be materially hit. Dated Brent, normally at a premium of less than $US2 a barrel to futures, was around $US125 late last week after a sudden jump, a sign of urgent near-term buying. Futures have risen on the risk that renewed fighting disrupts Middle East supply. The United States and Israel launched their attacks on 28 February; nearly eight months later, the article says Trump’s confidence that the war could be finished quickly has not been borne out, and futures pricing suggests traders share that scepticism about his “Department of War”.
Refined fuel is a separate constraint. Middle Eastern oil refineries have suffered significant damage. Ukraine’s targeting of Russia’s refineries has also taken significant Russian supply out of the global market. Even if Middle East crude flows continued through renewed hostilities, flows of refined products would remain below pre-war levels from the two wars. Consumers and companies do not put crude oil in cars and trucks, so the pressure on gasoline, petrol and diesel is expected to last beyond the end of the fighting.