Yesterday and today have been two of the most dramatic days in the oil and bunker markets in recent history. Three days after Israel and the US initiated the bombardment of Iran, it must be concluded that the situation has escalated far faster than even the most pessimistic expectations.
See also this webinar-recording from our colleagues at Global Risk Management, GRM, from yesterday:
ARA
Increased spot premiums reacting to geopolitical tensions in the Middle East. BP refinery down for maintenance the next 3 weeks potentially placing pressure on March availability. Current market dynamics also mean incentivised Biofuel B100 is now 30-40usd cheaper than B30 lsmgo blends due to fossil grade premiums, weak biofuel demand and reduced FAME based feedstock premiums.
Panama
Supply tight due to very high demand in Panama.
Gibraltar
Expect troubles depending on the situation with cargo flows. Bad weather may create backlogs as well. Price volatility is very strong.
Port Louis
The past week has seen moderate demand in Port Louis, with avails steady. The weekend news however could put pay to this situation, as we are already seeing higher premiums and active demand this Monday as clients look at alternate plans to Red Sea transits.
Durban
One supplier is tight on avails until mid-end March in Durban. Others are anticipating stronger container demand as vessels potentially transit from the Middle East around the Cape; avails expected to tighten in coming weeks.
Walvis Bay
Tight HSFO remains in the WAF region, along with poor weather resulting in vessels taking bunkers at Walvis Bay anchorage. Suppliers anticipate a pick up in the coming week as owners gauge best way to transit from Asia to Europe.
For port availability and demand, download the full report here.
The Strait of Hormuz, through which 20% of global oil and LNG, as well as a large share of global oil products, pass, is now in practice closed. Last night, what appeared to be an official statement from Iran via the Revolutionary Guard said that they would fire on all vessels attempting to pass through the strait. A large number of oil and product tankers are anchored on both sides of the strait. Yesterday, a European-owned vessel under US flag was hit by a missile in the port of Bahrain.
It is now clear that energy facilities are not being spared. There have been attacks on the largest refinery in Saudi Arabia, Ras Tanura, and QatarEnergy declared force majeure on LNG deliveries after LNG infrastructure was hit by drones.
The war has escalated. Several Gulf countries are threatening retaliation against Iran. The US has asked all Americans to leave the Middle East for security reasons. Six US soldiers have lost their lives. This will be difficult, however, as air traffic is completely paralysed. Israel is attacking in Lebanon. Iran has attacked the US embassy in Riyadh overnight.
Defense Secretary Hegseth, a former Fox News host, rejects the idea of an “endless war”. However, Trump says there is no “fixed timeline”. Trump previously spoke of four weeks. Ground troops are no longer being ruled out. If Trump and the White House believed that Iran could be handled as easily as Venezuela, they have been gravely mistaken.
This is only part of the news flow from the past 24 hours. While the market may have anticipated a short war yesterday, participants are now beginning to realise that the risk of a geographical and prolonged escalation is very high.
In relation to the oil market, it is also becoming clear that it will be extremely difficult to force open the Strait of Hormuz through air strikes alone. It will be close to impossible. The closure of the Red Sea entry by the Houthis has shown how relatively easily threats can halt transit. Today, global equity markets are also in the red.
Brent has been highly volatile since the weekend. After opening above USD 80 Monday, the price remained below that level and briefly traded under USD 76. This was likely profit-taking in the early hours. Prices then moved higher during yesterday and today and are trading again at USD 84 at the time of writing. The May contract closed at USD 73 on Friday.
We assess that the market will increase in price in the event of a prolonged closure of the Strait of Hormuz. We can also expect increasing speculative inflows into oil futures. With equity markets under pressure, rising inflation and geopolitical fear, this would be an obvious reallocation for investors.
We may expect the US to open its strategic reserves this week. Rubio mentioned yesterday that a plan would be presented to curb the rise in oil prices. The market largely ignored this. It could present a buying opportunity if prices fall temporarily on such an announcement.
The major market reaction, however, came in the diesel, jet fuel and gasoil markets. The benchmark ICE gasoil future rose by USD 134/MT yesterday and has increased by a further USD 145 MT today, currently trading at USD 1021/MT.
Unlike the crude oil market, the distillate market lacks a significant buffer to absorb supply shocks, with generally low inventories and limited or no strategic reserves. It is the blockade of the Strait of Hormuz and the shutdown of the Ras Tanura refinery in Saudi Arabia that are driving fear in the market.
The EU is particularly hard hit. According to BNEF, the Middle East supplies around 30% of the EU’s distillate imports. Roughly two-thirds pass through the Strait of Hormuz. This share has been increasing following the January ban on importing products based on Russian oil, as is the case in China and previously in India.
The so-called crack for ICE gasoil, the difference between a barrel of gasoil and a barrel of Brent, has increased by around USD 11 per barrel. While crude oil prices have risen by 15%, gasoil prices have surged by more than 35% since Friday’s close.
There are signs of panic in the market, and we should expect some very volatile trading sessions in the coming days.
In the fuel oil market, we have also seen rising cracks. VLSFO is a blending product, and higher gasoil prices are pushing the market up. With the closure of the Strait of Hormuz and a possible blockade of Iranian vessels, there is significantly less heavy/sour crude in the market. This means fewer residuals and, therefore, more expensive HSFO.
Shipping is once again avoiding the Red Sea, and the blockade of the Strait of Hormuz implies longer supply chains and increased demand for bunker fuel.
