Oil above $85 as risks to Middle East crude flows mount

Oil resumed gains as concerns mount about disruptions to flows from the Middle East, with the US continuing to strike Iran. 

Global benchmark Brent pushed above $85 a barrel after inching lower earlier in the day. Prices gained 12% in the previous three sessions. 

Reuters reported that Tehran had told Yemen’s Houthi rebel group to close the Red Sea shipping route if Iran power infrastructure is attacked. The waterway has provided a vital lifeline for Saudi Arabia’s oil exports, with the Iran war disrupting flows through the Strait of Hormuz. 

Tehran has repeatedly threatened to shut the waterway during the conflict, but so far the Houthis, an integral part of Iran’s proxy network, have refrained from doing so. 

A spate of Iranian attacks on shipping this week has already squeezed the trade of shuttling oil out of Hormuz, which had become one of the main ways Persian Gulf producers found to get their crude to markets. Still, many vessels had previously been crossing the waterway dark, making it hard to ascertain changes in traffic volumes. 

US Central Command said the number of ships crossing the waterway on Tuesday night with American support was in the double digits. 

Overnight, the US completed more airstrikes on Iran and hit a supertanker near the Islamic Republic’s main export terminal deep inside the Persian Gulf. 

Crude has soared to its highest in about a month as the escalation in the conflict revives concerns over flows from the energy-rich region, erasing part of a roughly 30% slump in the second quarter. Meanwhile, near-daily Ukrainian strikes on Russian refineries and tankers further threaten global fuel supplies.

“Markets are nervous, whether or not there will be a soon and lasting solution to this conflict,” International Energy Agency Executive Director Fatih Birol said in a Bloomberg TV interview. “I hope the crisis will be solved quickly and in a convincing way, otherwise the global economy may face some difficulties.”Play Video

Meanwhile, Iraqi oil loadings continued after a tanker earlier came under attack while loading there. Bloomberg reported earlier that the country had suspended oil-loading at Basrah after a tanker was struck by a drone there, citing a person with knowledge of the matter said.

US President Donald Trump pledged to intensify the bombardment of Iran until Tehran stops attacking ships in the strait and agrees to open the energy chokepoint. The Wall Street Journal reported that Trump is leaning toward expanding military operations and discussed the seizure of Kharg Island, home to the Islamic Republic’s main oil export terminal. 

Tehran has shown little sign of backing down. The Islamic Revolutionary Guard Corps said on Wednesday the strait will remain closed until the US ends its strikes and the blockade of Iranian ports.

A seven-day moving average of oil flows through the strait has slumped by 4.6 million barrels a day to 3.9 million a day since fighting resumed a week ago, reflecting the collapse of the ceasefire, renewed Iranian attacks and the return of the US blockade, RBC Capital Markets LLC analysts including Helima Croft said.  

Even if Trump were to opt for a strategic retreat, “we do not see Hormuz traffic returning to pre-war levels as long as shippers have to contend with the threat of mines, missiles, drones, and Tehran tolls,” they said.Play Video

Markets may adjust to the backdrop rather than expect a return to normal, John Woods, chief investment officer and head of investment solutions for Asia at Lombard Odier, said in an interview with Bloomberg TV. 

“What we’re likely to see now is something along the lines of a semi-permanent, periodic disruption” in oil flows through the strait, and it’s one that the market will have to come to terms with, Woods said.

Brent may carry a lasting premium of $5 to $15 a barrel as the new normal, he said.

By Kanoko Matsuyama and Alex Longley