Brent crude tops $100 a barrel. How the next stop could be $120
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U.S. oil just topped $90 a barrel and Brent crude is passed $100 a barrel.
A number of new factors could mean this crude comeback has legs.
For example, what happens if all Iranian oil suddenly went offline?
It's an outlier thought. Maybe it's crazy. While we can't all agree on much, can we at least agree that maybe now is the exact right time for crazy, outlier thoughts?
Before I get to that, here's a quick synopsis of where we stand right now with the nearly hour-by-hour headlines around Hormuz and energy.
Angry militants in Iran continue to risk a wider war with the U.S., killing American servicemen in an attack on our ally Jordan. Trump again has warned the country, saying those responsible will "pay" for the attacks.
At the same time, one of Iran's proxy terror groups, called the Houthis, is trying to ratchet things up by imposing a Red Sea blockade .
As I've written often lately, it's an incredibly fluid, scary time where the news can change by the time you read this.
As I've been thinking about what's going on, the one thought that hasn't really played out is: what happens if all Iranian oil went offline? Right now Iran is still selling some oil on the global markets, either by avoiding the Strait blockade or by using the time under the peace MOU to increase sales and raise money. So what would happen if something were to happen to Iran's oil hub, Kharg Island? Or the employees of the National Iran Oil Co (NIOC) just walked off the job and crushed Iranian production?
Oil expert Eric Nuttall of Canada's Ninepoint Partners, a Toronto-based alternative asset management firm, said the risk to prices is higher, and he lays out the Iran scenario like this:
"With Middle Eastern production still down 7-8MM Bbl/d, global onshore inventories at near record low seasonal levels, an increasingly depleted US SPR, and significant tightness in refined product stocks, the world simply cannot afford to lose a further 2.6MM Bbl/d of Iranian production. The market up until now has been looking through or flat out ignoring the inevitable supply shock if the status quo persists, our base case expectation. Perhaps Iranian oil production going offline would be enough to finally act as a reality check. We think record high crack spreads are a leading indicator for what price action will look like for oil in the near future."
Kevin Book of Clearview Energy Partners, an independent energy policy research firm that produces must-read research and is interviewed in our Inside Line below, says the key is how long Iranian oil were to be offline, but the market would be looking at a $5 per barrel increase at the minimum.
And Rapidan Energy Group's Bob McNally is direct in his message, telling me that "all [Iran's] exports are offline pretty much," but if all their actual oil production closed, then "their refineries would shut down, and they'd have no more refined products after they drained storage. Transportation would grind to a halt. It would crush their economy."
So while it's a potentially crazy question about Iran and Hormuz, don't write off the "no Iran oil" as pure fantasy.
Speaking of Hormuz, these days you need to keep your Straits straight. The next geographic area to study up on is the Bab el-Mandeb Strait (BAM). The BAM is the narrow strait that runs between Yemen and Africa and is about as wide as Hormuz. The Strait is the only southern entry to the Red Sea, another waterway critical for oil and product flows.
RBI #2→ Some believe that thousands of years ago the BAM was shallow enough that humans could walk across it, leading to increased migration.
The risk to BAM is real. And it may be a reason why brent crude is nearing $100 a barrel.
Tobin Marcus of Wolfe Research writes that the market continues to believe things will get better from here and both the U.S. and Iran will be forced to de-escalate. But Marcus also thinks we shouldn't automatically underestimate the risk of some kind of supply disruption around the Red Sea. With Saudi Arabia pumping more oil through its East-West pipeline into the port of Yanbu, any Houthi attacks risk about 4½ million barrels of oil per day.
Iranian strongmen may believe they have the upper hand right now, as the new attacks have led to a new drop in crude oil tanker traffic out of the SOH. An insurance industry source tells me that while a shipowner "can get cover" - the industry term for insurance - there isn't much demand because ship traffic has again slowed considerably.
Bottom line, here's my Power Point takeaway on oil, energy and the macro markets. This spring, we learned that stocks can keep going higher even if oil and gasoline go up. That's certainly surprised many, myself included. It's likely for a cornucopia of reasons, and the energy-specific would be that gasoline was more expensive in the summer of 2022 than it is now (we got used to it), cars get better fuel mileage than they used to, and many of you now have the ability to work from home. The bigger reason, however, is that the trillions in A.I.-related spending is helping power incomes and the economy more than gasoline can cut it down.
I'm actually writing some of these words from the Milwaukee, Wisconsin airport where I was stranded by a canceled flight. A flight, I might add, that was oversold both ways, despite air fares that few would call cheap. I fly more than most, and I can tell you that across America, people are spending money on travel this summer. Gasoline prices be darned ... at least for now.
WALL STREET'S TAKE The team at Goldman Sachs is back on the tape with a new oil note. Daan Struyven writes that Brent crude oil might rise back above $120 per barrel in the 4th quarter if Hormuz remains disrupted.
Struyven also warns that "recent…
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