Explosion Of Geopolitical Risk Isn’t Moving Oil

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By Nick Cunningham

The tanker battles are escalating once again, but the threat of outages and rising tension in the Persian Gulf has failed to meaningfully move oil prices.

On Friday, Iranian forces seized a British oil tanker in the Strait of Hormuz, sending a shock of alarm through the oil market and leading to another round of escalation between Iran and western powers. A second boat was also stopped by Iranian forces, although it was later released.

But despite tough talk from the UK government – threatening “serious consequences” for Iran – British Defense Minister Tobias Ellwood said that he wanted to de-escalate the situation. The foreign secretary also said that the UK would be using diplomacy to resolve the standoff, and was not looking at military options. The Iranian seizure of a British ship on Friday comes after the UK seized an Iranian oil tanker in Gibraltar earlier this month.

To be sure, oil prices gained rougly 1 percent on Tuesday morning on heightened tensions. The UK government has told British tankers to avoid the Strait of Hormuz. At least eight British tankers already in the region are now anchored and unable to move, according to the Wall Street Journal. “It isn’t possible simply to escort each and every single vessel,” Defense Minister Tobias Ellwood said.

Shipping insurance has climbed following multiple rounds of seizures and tanker attacks earlier this year and the latest seizure only underscores the risk. “The area is explosive. We are taking our two ships the hell out of there,” a Greek shipowner, who operates more than 15 tankers, told the Wall Street Journal.

But the gains to oil prices come after crude lost more than 6 percent last week. “In view of this and the growing tensions between the West and Iran over seized oil tankers, today’s price reaction is still comparatively muted,” Commerzbank wrote in a note. “[P]assing through the Strait of Hormuz involves considerable risks for international oil tankers, which in our opinion justifies a considerably higher risk premium on the oil price than is currently the case.”

“The International Energy Agency is closely monitoring developments in the Strait of Hormuz, including the recent seizure of a UK-flagged oil tanker, and stands ready to act if needed,” the IEA said in a statement. “IEA countries hold 1.55 billion barrels of public emergency oil stocks. In addition, 650 million barrels are held by industry under government obligations, and can be released as needed.” The agency said that these volumes are more than enough to cover for any outage in the Strait of Hormuz, even for “an extended period.”

Roughly 20 million barrels of oil pass through Hormuz every day, which is equivalent to about a fifth of a global supply. Nearly a quarter of the global LNG trade also involves transit through the narrow strait.

However, despite elevated risk, all sides seem intent on confining the confrontation to rather minor tit-for-tat maneuvers, with the leadership in both Tehran and Washington explicitly stating that they want to avoid war. “The president has been very clear that he wants to do this through diplomatic and economic channels,” a top American official told the WSJ. “He does not want another war in the Middle East.”

Meanwhile, a few other unrelated items undercut the bullish pressure on crude. As Bloomberg reports, Iranian oil is piling up in storage in China. The oil is being put into “bonded storage,” sources told Bloomberg, which means that supplies are filling up even as the oil goes unreported in customs data. The oil may be kept out of circulation for a period of time, but the fact that Iran is succeeding in exporting oil will have a bearish effect. Eventually it will be dumped onto the market. “Iranian oil shipments have been flowing into Chinese bonded storage for some months now, and continue to do so despite increased scrutiny,” Rachel Yew, an analyst at industry consultant FGE in Singapore, said in a Bloomberg interview. In response, the U.S. government announced new sanctions on Chinese firm Zhuhai Zhenrong for buying and moving oil in violation of American sanctions. It’s unclear how effective this move will be in deterring buyers from purchasing Iranian oil.

At the same time, oil production from Libya’s largest field, the Sharara, is about to come back online, according to Libya’s National Oil Corp. The NOC lifted force majeure on shipments from the Sharara, and output could be restored quickly after suffering an outage over the weekend.

More importantly, the realization that the oil market is suffering from an overall surplus, which may only grow worse next year, is overwhelming the supply risk from the Persian Gulf. “There’s plenty of oil; Iranian crude is not exotic, there’s plenty of compatible grades, Saudi is one of them,” U.S. State Department’s special representative for Iran, Brian Hook, told S&P Global Platts. “It has been the case that because we have such a well-supplied oil market that that has not been a concern that we have had to work through.”

“Consumers can be reassured that the oil market is currently well supplied, with oil production exceeding demand in the first half of 2019, pushing up global stocks by 900,000 barrels per day,” the IEA said.

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