Oil markets are once again following a familiar pattern tied to the war with Iran
- Iran Wants Control of Hormuz
- The Problem Is No Longer Just Crude Oil
- Russia Adds to the Pressure
- Negotiations Remain the Most Likely Outcome
- There Is Little Protection
Authored by GoldFix
Oil markets are once again following a familiar pattern tied to the war with Iran. We label that pattern as:
Escalate. Negotiate. Violate. Repeat.
J.P. Morgan describes the cycle in more formal terms, but the basic pattern is the same. Each round of negotiations is followed by a breakdown, renewed military action, and then another attempt to reach an agreement.
The bank also looks beyond Iran, explaining how the conflict is affecting different parts of the global energy market, including Russian refining and fuel exports.
According to them, the renewed confrontation over the Strait of Hormuz has interrupted the recovery in Middle Eastern oil exports. More importantly, the crisis is beginning to create a shortage of refined fuels such as diesel, gasoline, and jet fuel, rather than simply reducing the supply of crude oil.
Although shipping through the Strait has fallen sharply, J.P. Morgan still believes Iran and the United States are mainly trying to improve their positions at the negotiating table. The bank does not believe either side is actively seeking a long and open-ended war.
J.P. Morgan commodities strategist Natasha Kaneva and her team argue that the dispute is becoming a struggle over who controls navigation through one of the world’s most important energy routes. Iran appears less interested in permanently closing the Strait than in gaining authority over how commercial ships are allowed to pass, including the routes they use, the procedures they follow, and the fees they may be required to pay.
Iran Wants Control of Hormuz
The latest escalation began when Iran attempted to place new conditions on commercial vessels crossing the Strait. Oman responded by opening a US-backed route along its coastline, allowing stranded ships to leave without following Iran’s preferred procedures.
When several vessels tried to cross without meeting Tehran’s requirements, Iran attacked commercial ships near the Omani coast. The United States then restored sanctions on Iranian oil exports and resumed a blockade of Iranian ports. Iran responded by again declaring the Strait closed.
The conflict widened further when the Iran-backed Houthis launched missiles at Saudi Arabia. That attack ended a period of relative calm and increased the risk that the fighting could spread across the region.
“The back-and-forth is hardening into a standoff over who controls the Strait.”
The confrontation has stopped the recovery in shipping that began in early June. Confirmed oil flows through Hormuz have fallen to about 5.1 million barrels per day from 12.5 million barrels per day only one week earlier. Iranian exports account for roughly 1.7 million barrels per day of the remaining traffic.
Most ships are now using routes approved by Iran or less visible channels that involve switching off tracking signals. Traffic through Omani waters has largely disappeared following the attacks near the Omani coast.
The Problem Is No Longer Just Crude Oil
J.P. Morgan says the market for refined fuels is weakening even faster than the crude oil market.
Persian Gulf exports of diesel, gasoline, jet fuel, fuel oil, naphtha, and other products had temporarily recovered to about 1.9 million barrels per day. Before the war, those exports were closer to 3 million barrels per day. They have now fallen again to roughly 1.2 million barrels per day.
The earlier improvement came mainly from selling products that were already stored on ships. Much of that floating inventory has now been used. Any lasting recovery will require refineries to increase production and create new supplies for export.
This is especially important for President Trump because rising gasoline and diesel prices can quickly become a political problem. Higher fuel prices tend to hurt consumer confidence and presidential approval ratings, while also increasing the risk of Democratic sweeps in the midterm elections.This has been noted by Michael Hartnett several times and covered in this space acccordingly
At the worst point of the disruption, refinery shutdowns removed about 3 million barrels per day of potential fuel-export capacity. Only part of that capacity has returned. J.P. Morgan estimates that roughly 2.1 million barrels per day of refinery production remains offline.
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