Oil Surges Past $100 – Iran Conflict Enters Second Week

Extreme volatility continues this morning, with US crude prices reaching as high as $115/bbl in early morning trading, though prices have since fallen back to the $100 mark. Diesel also experienced a temporary surge up to $4.47/gal before retreating.

As the Iran conflict enters its second week, the gravity of the production outages is beginning to spread. The Strait of Hormuz, a transit point for roughly 20% of the world’s oil, remains closed, with no clear signs ahead of when it might reopen. Without a way to get to market, Gulf oil producers such as Iraq, Saudi Arabia, and Kuwait are shuttering production, triggering price hikes. After the initial spikes, markets cooled following reports that G7 members are meeting today to consider releasing strategic petroleum reserves worldwide. However, during a teleconference held this morning, the group ultimately decided not to move forward with the measure at this time.

The situation in Iran suggests that the conflict could continue for the foreseeable future. Iran appointed Mojtaba Khamenei, the son of the former Ayatollah, as the new Supreme Leader. His views largely reflect those of his father, and President Trump shared he was “not happy” with the new leadership. Israel has previously stated that any new leadership would become an assassination target as well, suggesting more volatility ahead.

Although the US has dealt devastating blows to Iran’s military, the country has decentralized its military, allowing individual groups to act independently to continue the conflict and making it hard to predict when retaliatory strikes could end. Over the weekend, Iranian missiles and droned continue threatening refining and export infrastructure, including facilities in Bahrain, Saudi Arabia, and the UAE.

Continued conflict could severely strain global oil markets. Goldman Sachs reported today that fuel prices could exceed the 2008 and 2022 peaks if the Strait remains closed through March. Already, diesel has exceeded its 2008 high.  Expect continued volatility in the days ahead, and further price gains if supply remains offline.

In response to supply outages, world leaders are meeting today to discuss a release from strategic petroleum reserves around the world. Goldman Sachs reported that US officials are suggesting releasing 300-400 million barrels, which would be about a month of lost output from Gulf producers. That would also represent around 25%-30% of all global emergency reserves. It’s unclear how quickly these strategic reserves could be emptied, as an outage of this size is unprecedented.