Key Takeaways
A week in, the conflict in Iran continues to affect energy supplies that transit the Strait of Hormuz, where 20% of both oil and LNG flow, mainly to reach Asian importers.
President Trump believes the price hikes are temporary, receding when hostilities end.
China, however, is hard-pressed and asking Iran for safe passage of oil and LNG, upon which it is heavily dependent.
Trump is permitting India to purchase some Russian oil to feed its extensive refineries amid current supply difficulties.
U.S. shale oil producers are unlikely to offset any major loss of Middle East supply as hedging, capital discipline, and shareholder returns have taken priority over drilling growth.
On the morning of March 6, Brent crude oil, the global benchmark, topped $89 a barrel, and the average price of gasoline in the United States rose 11% in a week. President Trump said he does not have “any concern” about rising U.S. gas prices driven by the conflict. Gasoline prices will “drop very rapidly when this is over, and if they rise, they rise,” he told Reuters, adding, “This is far more important than having gasoline prices go up a little bit,” noting that the U.S. military operation is his current priority.
President Trump is confident that the Strait of Hormuz will remain open because Iran’s navy is essentially at the “bottom of the sea.” Despite his comments, Energy Secretary Chris Wright has engaged with oil CEOs to explore options to keep oil prices from rising, as President Trump does not want to tap into the Strategic Petroleum Reserve (SPR). President Biden depleted the reserve when Russia invaded Ukraine to keep oil prices in check before the midterm elections.
President Trump has announced a plan to provide safe passage for tankers and to offer government-backed insurance to shipping companies, but shipowners have not yet felt assured of safe passage. Despite Trump’s pledge, the Joint Maritime Information Center, which monitors threat assessments on high-risk shipping routes, said that maritime traffic in the region was essentially paralyzed. Recent crossings were two cargo ships; no oil tankers that could be traced by transponders. Ships with transponders turned off are harder to monitor. The frequency of attacks on ships in and around the strait remains high, making it risky for energy tankers to attempt to transit. There has also been sophisticated interference with global positioning system signals, affecting navigational and communication. One Greek billionaire, George Prokopiou, is taking the risk, sending at least five oil and LNG tankers through the strait with transponders turned off, charging extremely high shipping rates.
Analysts warn that unless trade flows resume soon, the global oil supply could be severely curtailed, triggering higher prices. China is asking Iran to allow oil and Qatari liquefied natural gas (LNG) through the Strait of Hormuz, as China gets about 45% of its oil from the Strait. Shipping through the Strait between Iran and Oman accounts for around one-fifth of the oil consumed globally and 20% of the gas, of which Asia accounts for over 80%. More than 20 million barrels of crude oil, condensate, and fuels passed through the Strait of Hormuz daily last year on average. OPEC members Saudi Arabia, Iran, the United Arab Emirates, Kuwait, and Iraq export most of their oil via the Strait, mainly to Asia.
Other options to keep U.S. gasoline prices from skyrocketing include declaring a federal gasoline tax holiday and loosening environmental regulations on summer gasoline to allow higher ethanol blends.
To keep up the global supply of oil, Treasury Secretary Scott Bessent granted India a 30-day waiver to buy sanctioned Russian oil—sanctions imposed by the West on Russia because of its war with Ukraine. Indian refiners are buying millions of barrels of Russian oil stuck at sea, which Russia is happy to sell at higher prices due to the conflict with Iran. India’s alternative suppliers are mainly in the Persian Gulf, limiting its options to obtain oil, 90% of which is imported. India had started tapering off its oil purchases with Russia due to its trade deal with the United States, but had not yet stopped all Russian oil imports, as it takes nearly a month for tankers loaded in Russia to reach Indian ports, so cargoes loaded before it settled a trade deal about four weeks ago were still being delivered.
U.S. shale oil producers are unlikely to offset any major loss of Middle East supply as hedging, capital discipline, and shareholder returns have taken priority over drilling growth. The International Energy Agency estimates U.S. oil producers could supply 240,000 barrels per day in May and another 400,000 barrels per day in the second half of the year from recently drilled wells that have not yet started production, far short of the more than 15 million barrels per day threatened by disruption in the Strait of Hormuz.
Many executives indicate they would only consider adding rigs if oil prices remain above the $75 to $85 per barrel range for several months. It makes little sense to them to add expensive rigs that can take six weeks to contract and boost production when the war could be short-lived, and oil prices quickly drop, as President Trump is indicating, particularly since there is currently an oversupply of oil. Before the attacks, analysts at S&P Global Energy expected global oil production this year to exceed demand by an average of 1 million barrels a day. Prolonged supply disruptions, however, could result in a deficit.
The Energy Information Administration expects U.S. oil production to reach about 13.7 million barrels a day in February, up nearly 600,000 barrels from when President Trump took office. Shale companies have become proficient at drilling fewer, but much longer, horizontal wells, thereby lowering extraction costs and increasing oil production. Oil producers routinely frack multiple wells at the same time and do so virtually around the clock, which also saves on costs.
Analysis
The conflict in Iran is ongoing and affecting energy supplies that transit the Strait of Hormuz, where 20% of both the oil and LNG flow, mainly to reach Asian importers. Oil, LNG, and gasoline prices have risen, though they are somewhat contained due to the current oversupply of oil. If it is a prolonged conflict, however, the glut will disappear, and prices will increase. President Trump sees the higher prices as temporary, dropping as soon as the conflict ends, but that depends largely on how quickly oil can move through the Strait of Hormuz.
China, which is dependent on the strait for a large amount of its oil and LNG, is asking Iran to allow ships to pass. To keep oil flows moving, the United States is granting India a 30-day waiver to continue receiving sanctioned Russian oil that would have been terminated under the U.S.-India trade deal. The United States is also looking into options to keep U.S. gasoline prices in check, including a federal gas tax holiday and allowing more ethanol to be blended. Releases from SPR remain an option that President Trump does not prefer, since his administration is trying to refill the reserve after President Biden depleted much of it.
