Key Takeaways
Reciprocal strikes by Iran and Israel led to the first attacks between the nations since the April ceasefire.
Oil prices rose by over 4% in response to the hostilities.
OPEC+ announced a targeted production increase for July, the 4th such output increase in a row, despite production increases being constrained by the closure of the Strait of Hormuz.
Prices have increased but remain limited because traders believe that a resolution to the Iran conflict is within reach, although the loss of production since the start of the conflict is over 1 billion barrels.
Early Monday trading saw oil prices rise more than 4% as Iran and Israel exchanged strikes, raising concerns that renewed Middle East fighting could disrupt energy supplies. Brent climbed to $97.65 per barrel, and West Texas Intermediate advanced to $94.60 per barrel, even though OPEC+ agreed to raise oil production targets by 188,000 barrels per day from July, the fourth oil output quota hike approved since the closure of the Strait of Hormuz. Iran launched ballistic missiles at Israel on Sunday night, and Israel retaliated with strikes on military targets in western and central Iran despite calls from Trump to not respond to the Iranian missiles. It was the first such attack since the April ceasefire agreement. As of Thursday, June 11th, the WTI spot price has fallen to around $87, with Brent spot prices near $89.50.
OPEC+ announced a production target increase for July that was on par with June’s target, which had been lowered from monthly increases of 206,000 barrels per day in May and April, when the UAE decided to withdraw from the organization. The group has approved a series of output hikes totaling nearly 600,000 barrels per day since April, excluding the July number. Still, it has been a paper exercise, as most oil producers in the Middle East cannot restore production to pre-war levels due to the ongoing closure of the Strait of Hormuz. There are seven OPEC+ members that, in theory, could add production: Saudi Arabia, Iraq, Kuwait, Algeria, Kazakhstan, Russia, and Oman. Iraq has been especially hard hit by the closure of the strait, with its production falling from over 4 million barrels per day to 1.4 million barrels per day as of May.
Since the start of the war, benchmark prices have gained over $20 per barrel, and on several occasions, spiked above $100 per barrel. Traders remain hopeful that the Strait of Hormuz will be reopened, but forecasters note that if it is not reopened soon, oil prices could soar as commercial and strategic stocks are being depleted. The U.S. Strategic Petroleum Reserve has hit its lowest level since the 1980s as President Biden released oil from it to keep prices down before the 2022 mid-term elections, and not much has been refilled because repairs from the withdrawals slowed refills. Some 400 oil storage tanks in Cushing, Oklahoma, are nearly empty, as oil stocks have been drawn down to meet domestic demand and exports, as the United States tries to compensate for some of the lost production and exports in the Middle East. U.S. crude oil exports reached a record of 5.6 million barrels per day in May. Since the conflict with Iran started, the world has lost over a billion barrels of supply.
Cushing inventories fell to 22.4 million barrels as of May 29, down from about 4 million barrels compared to before the U.S.-Israeli war with Iran began. Stocks dropped by 500,000 barrels between May 29 and June 2, according to oil storage data provider AlphaBBL, which uses drones, planes, and satellites to measure and estimate oil storage. When Cushing storage falls below 20 million barrels, operational challenges could arise as storage approaches its minimum. At operational minimum levels, there is not enough oil in a tank to pump out and transfer between tanks, which could delay or cut the outbound flow of oil from Cushing. Some tanks have outlets at the bottom that allow complete oil removal, while others do not, making it challenging to remove oil at the base.
Cushing is a major source of oil for plants in the Midwest farm belt and Gulf Coast export hub. It has a working capacity to hold about 78.4 million barrels. Total U.S. crude oil inventories dropped to 43.4 million barrels, dropping by about 63.9 million barrels, or 7.5%, since the war began due to strong drawdowns in both commercial stocks and the Strategic Petroleum Reserve.
Goldman Sachs sees a two-sided risk to oil demand and, by extension, to oil prices. The bank estimated global demand destruction in April was 4 million to 5 million barrels per day, as the closure of the Strait of Hormuz to oil tankers reduced global demand by 4% to 5%, primarily due to weaker consumption in China and Western Europe. The continued decline in demand could lead to lower oil prices, while a significant decline in global oil supplies could lead to much higher prices.
Conclusion
Oil prices rose over 4% on a missile exchange between Iran and Israel. Globally, oil stocks in commercial and strategic reserves are being depleted, prompting forecasters to warn of much higher oil prices if the Strait of Hormuz is not reopened. OPEC+ keeps announcing higher production targets, but as long as the Strait remains closed, the targets are just paper exercises since the Middle East members would not be able to produce their share. Goldman Sachs indicates that oil prices could go either way—up or down—depending on the state of demand destruction and global oil supplies.
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