Kamal Ghorui
The Iran war has entered its fourth week and global oil markets are showing a clear split with actual fuel supply prices are rising much faster than widely tracked oil futures. Brent crude, the global benchmark, has jumped over 50% to around $112 a barrel following the near-complete closure of the Strait of Hormuz and attacks on energy infrastructure in the Middle East. But the cost of physical oil, which is refined into petrol, diesel and jet fuel, has risen even more sharply as supplies become harder to secure. Refiners in Asia are now paying steep premiums above Brent to source cargoes from far-off regions, highlighting the shortage. But the impact is not limited to oil markets!Trucking companies are facing higher fuel bills, some parts of the shipping industry are cutting back on purchases, and airlines in Europe have warned that rising jet fuel prices, now above $200 a barrel, will be passed on to passengers, Bloomberg reported. The gap between futures prices and physical oil costs is partly due to steps taken by the countries to control price rises, including releasing emergency stockpiles. However, the broader impact on the global economy appears stronger than what futures markets suggest. Commenting on US oil markets, Jeff Currie, chief strategy officer of energy pathways at Carlyle Group Inc told Bloomberg, “You look at the paper markets, they’ve entirely disconnected from the physical markets…We’re dealing with an enormous supply shock.” There are concerns that prices could rise further if the conflict continues. Goldman Sachs Group Inc. and Citigroup Inc. have said oil futures may cross the previous record of $147.50 set in 2008 in the coming weeks. Such a large and lasting gap between futures and real prices is unusual. The disruption has been described by the International Energy Agency as the biggest oil supply shock ever. Goldman estimates that about 17 million barrels per day flowing through the Persian Gulf are being affected. In the past two weeks, Brent has come close to $120 a barrel twice, a level last seen in 2022, further piling pressure on the US government to act. US treasury secretary Scott Bessent said that the country could consider another release from its reserves, even after a major recent drawdown. He also announced waiving sanctions on Iranian oil currently in transit for a month till April 19. Other steps to manage prices include moves involving Russian oil shipments at sea, while speculation continues about possible US intervention in futures markets, something Bessent has denied. At the same time, high market volatility has made trading more expensive, limiting activity and keeping futures prices somewhat in check, though not enough to offset supply shortages. “The US has almost exhausted the arsenal for stopping prices from rising, given this degree of uncertainty, if the strait isn’t opened and the uncertainty of physical damage isn’t removed,” Christof Ruhl, global advisor at Crystol Energy and a former BP Plc economist, said in a Bloomberg TV interview. “So there isn’t much they can do.” Signs of strain are visible across the economy. Shipping companies are adding fuel surcharges, while some buyers are delaying large fuel purchases due to price swings. In the US, petrol prices are nearing $4 per gallon and diesel has crossed $5. In Germany, a heating oil seller said people are buying only “when absolutely necessary,” and airlines have cancelled some flights as fuel costs rise. “Movements in energy markets feed through to our cost base almost immediately,” said Pavel Kveten, Chief Executive Officer at Girteka Logistics, one of Europe’s top trucking companies. Fuel makes up about 30% of the firm’s transport costs, he said. The rush for available crude is also pushing up regional prices. Oman crude has crossed $162 a barrel, while Murban crude from the United Arab Emirates has moved above $145. Asian buyers have increased purchases of US oil to the highest level in three years as they look to replace disrupted Middle Eastern supplies.Meanwhile in the Middle East, there are no clear signs of easing. Iranian officials are said to be reluctant to discuss reopening the Strait of Hormuz as they deal with ongoing attacks, a person involved in high-level contacts with Tehran told Bloomberg. “We see little relief for the deepening energy crisis as more energy facilities come under fire,” RBC Capital Markets LLC analyst Helima Croft said in a note. “Administration officials have spent considerable manhours working to convey to market participants that the disruption will be short-lived as the war will soon wind down. Yet nothing points to a limited engagement at this juncture.”
