Just as oil prices on the futures market slip again on hopes for a quick end to the war in the Middle East, the head of the International Energy Agency issued a warning: prices are going to go higher yet.
“Prices are already high, but they are not reflecting the severity of the problem — I agree there is a disconnect,” Fatih Birol said at an event this week, as quoted by Bloomberg. “But I think soon we will see they will converge, which is an extremely sensitive issue for the global economy.”
The war has so far cost Middle Eastern producers as much as 13 million barrels daily in lost output, and that is just crude oil. Exports of crude plus refined products have slumped by an estimated 20 million barrels, the head of the IEA said. He added that more than 80 oil and gas facilities in the region have been damaged, contributing to the severity of the situation.
Meanwhile, the longer the war continues, the more oil production will be lost. Nomura this week warned that it expected an additional loss of 2.3 million barrels daily for March. Compared to a year earlier, Middle Eastern oil production is down by 9.3 million barrels daily, equal to a rather concerning supply squeeze of 57%.
Despite these developments, oil benchmarks were down today, after topping $100 per barrel earlier this week following President Donald Trump’s latest move on Iran, involving a stated full blockade on vessel traffic to and from Iranian ports in the Persian Gulf. Analysts explained the decline with hopes that the ceasefire agreed at the end of last week would not be canceled despite the blockade.
Supply, however, remains constrained, as evidenced by the latest surge in physical oil prices. These hit an all-time high of $150 per barrel for oil for immediate delivery in Europe and Africa. The surge comes as parts of the world, notably Europe and Asia, scramble for fresh oil supply as the last tankers that left the Middle East before Iran closed the Strait of Hormuz approach their final destinations at receiving refineries.
“It will hit the west in a month when all the Asian cargoes bought leave the Atlantic basin,” Energy Aspects analyst Nic Dyer told the Financial Times. “Refineries in Europe and the US will also have to cut runs from next month to share the pain of the shortage,” Dyer noted.
In Asia, refiners are already ramping down, despite draws from strategic and commercial stockpiles, suggesting the crude oil supply squeeze is more serious than many futures traders might assume, echoing Birol’s expectations about much higher prices down the road.
“Signs are emerging that the system may be coming under increasing strain,” JP Morgan’s Natasha Kaneva told the FT. “European and Asian refiners are competing aggressively for the remaining cargoes, driving spot Brent price — more directly tied to prompt physical delivery than Brent futures — to record highs.”
Earlier this month, the IEA’s Birol said that the current oil crisis is worse than all oil shocks from the 20th and 21st centuries so far taken together. “The world has never experienced disruption to energy supply of such magnitude,” Birol told French newspaper Le Figaro in an interview. The IEA last month announced it would coordinate an emergency release of 400 million barrels from OECD stocks to tackle the crisis. This is the largest emergency oil release in the agency’s history.
The abrupt change in the tone of the agency that has for two years been predicting a slump in oil demand that was causing a massive glut is telling enough. It is evidence that a glut—massive or not so much—could flip into a shortage very quickly, shattering a lot of assumptions, including about oil demand.
