(WCTW) The Oil Market Breaking Point
Looking at the various scenarios for oil prices using the latest data.
In this piece, I will break down for you the various scenarios on the horizon. Now that we are nearly 4 weeks into this Iran conflict, what does that do to the oil market?
On March 9, we published a public piece titled, “My Latest Thoughts On The Oil And Natural Gas Market Amidst The Iran Conflict.” In it, I said:
Here’s what this means for oil prices (bbls lost scenario includes time to bring back production):
Scenario 1: Tanker flows resume tomorrow: Brent will average in the high $70s to low $80s for the rest of the year. (~210 million bbls lost)
Scenario 2: Tanker flows resume by March 15: Brent will average in the mid to high $80s for the rest of the year. (~290 million bbls lost)
Scenario 3: Tanker flows resume by March 22: Brent will average in the low $90s for the rest of the year. (~370 million bbls lost)
Scenario 4: Tanker flows resume by March 29: Brent will average in the mid-to-high $90s for the rest of the year. (~450 million bbls lost)
I don’t even want to contemplate what will happen to the oil market if tanker flows don’t resume to normal by March 29. Oil demand destruction is the only way out of it, and the prices will have to be extreme.
Soon after the report, IEA announced a global SPR release totalling 400 million bbls. This will dampen the impact of the supplies lost, but as we discussed in our follow up piece titled, “The IEA Just Gave Oil Bulls The Biggest Gift Ever By Coordinating The SPR Release.“ I wrote:
From an oil trading standpoint, traders will be reluctant to push oil prices up until the cushion is gone. The simultaneous SPR release will help dampen a lot of the worries over immediate supply needs, but it will only be a short-term fix. The market will remain on edge and with each passing day that tanker flows don’t return to normal, oil prices will gradually shift higher.
On the downside, an immediate ceasefire or any truce will send oil spiraling lower. For example, if a peace deal is announced before March 15, the net balance to global oil inventories will be +110 million bbls (400 million bbls - 290 million bbls).
This has the potential to send Brent back into the mid-$70s.
On the other hand, if there is no peace deal, and the disruption lasts until the end of March, the net balance will be -50 million bbls. With each passing week, the deficit increases by ~80 million bbls.
So yes, SPR buys time, but it does not fix the issue at hand. Tanker flows need to return to normal.
Thankfully, it does prevent a catastrophic price spike scenario in the near term, which will prevent meaningful demand destruction from taking place.
Fast forwarding to today, we are now at the March 29 scenario we laid out at the beginning of the month. Let’s look at the latest facts to discern where the oil market is headed.
Facts
Production shut-in total from Saudi Arabia, the UAE, Kuwait, Iraq, and Bahrain has reached 10.98 million b/d.
Iraq: -3.6 million b/d
Kuwait: -2.35 million b/d
UAE: -1.8 million b/d
Saudi: -3.05 million b/d
Bahrain: -0.18 million b/d
Saudi has maxed out the East-to-West pipeline. It is currently exporting ~4 million b/d in the Red Sea.
The UAE can also bypass via the Abu Dhabi pipeline (Habshan-Fujairah). The ~1.8 million b/d is also maxed out.
Tanker traffic flow in the Strait of Hormuz remains nonexistent. The fact is that even if the war ends tomorrow, it will take a few months to increase production and resume normal traffic.