Crude Oil
Risk Premium Rebounds Sharply as Hormuz Recloses
Crude prices rebounded this week as Hormuz reclosed Monday, reigniting fears of a prolonged supply disruption caused by the strait’s closure. The WTI may futures contract settled at Tuesday’s close at $92.13/Bbl. The prompt June contract settled the week at $__/Bbl, up ___ week over week (83.85). Reigniting tensions compounding with increasing physical tightness this week caused the large increase in crude prices.
Over last weekend, oil tankers began testing the strait as Iran claimed to reopen the Strait of Hormuz. However, the optimism was short lived. Late last weekend, the US seized an Iranian-linked tanker attempting to bypass its blockade, prompting threats of retaliation from Iran. Iran subsequently signaled that it may not attend upcoming negotiations aimed at formally ending the conflict. However, after a week of escalating tensions, Pakistani officials stated early Friday that Iranian Foreign Minister Abbas Araghchi was expected to arrive in Islamabad for talks with already present US officials.
This week, both the US military and the IRGC have seized ships from each other. After the ceasefire expired on Wednesday, Iranian media indicated two ships were seized by the IRGC, while a third was left disabled. The US responded by extending its ceasefire, opting to transition strategy to enforce its own naval blockade following the breakdown in discussions midweek. After which, the US seized two tankers over the next two days. Iranian supertanker, the Yuri, halted its transit through Hormuz Friday according to Bloomberg tracking data, signaling wariness to further test the US blockade.
The long-term impacts of the conflict are becoming more significant with each week the strait remains closed. Gulf crude production has fallen by over half since pre-war levels, down 14.5 MMBbl/d. This is another sharp decrease in output from March, when shut-ins averaged 7.5 MMBbl/d. Now that Iran exports are being curtailed by the US Blockade, even more Middle east oil production is at risk. JP Morgan analysts warn that if exports remain fully disrupted Iran would have to begin curbing production in roughly two weeks from now, with shut-ins potentially rising toward 2 MMBbl/d by 1 month from now. Analyst consensus is that full restoration of pre-war flows will take a few months to return to pre-war levels, and the longer the closure, the slower this recovery will be.