Global oil prices surged past $112 a barrel Friday, driven by escalating tensions in the Middle East and a widening gap between futures markets and the actual cost of securing physical crude supplies. The benchmark Brent crude rose more than 50% since the start of the conflict three weeks ago, but the price paid for delivered oil is rising at an even faster rate as supply dwindles and buyers scramble for available barrels.
Refineries in Asia, the world’s largest consuming region, are paying substantial premiums for shipments from thousands of miles away, attempting to secure any available supply. The impact of rising fuel costs is beginning to ripple through the transportation sector, with trucking companies feeling the pinch and some regions reducing fuel purchases for maritime shipping. Jet fuel prices exceeding $200 a barrel are prompting major European airlines to warn passengers of additional costs.
The divergence between futures prices – based on hundreds of billions of dollars in daily transactions – and the price of actual oil is partly attributed to intensive U.S. Efforts to curb prices, including releases from strategic reserves. However, the reality suggests the global economy is facing a larger inflationary shock than reflected in futures contracts, increasing pressure on monetary policymakers and the Biden administration ahead of midterm elections.
“If you glance at the paper markets, they’ve completely decoupled from the physical markets,” said Jeff Currie, head of commodity research at Carlyle Group. “We are dealing with a massive supply shock.”
Record prices are increasingly likely. Goldman Sachs and Citigroup this week indicated that, should the conflict continue, futures prices could reach historic highs in the coming weeks, surpassing the $147.50 peak seen in 2008. The gap between physical and futures prices rarely remains wide for extended periods.
The current situation represents what the International Energy Agency has described as the largest disruption to oil supplies in history. Goldman estimates that approximately 17 million barrels per day of oil flows through the Gulf region are affected by the conflict. Brent crude approached $120 twice in the past two weeks, a level not seen since 2022, putting pressure on Washington to calm the market.
Treasury Secretary Scott Pasent stated Thursday that the U.S. May consider another release from its strategic reserves, following a recent large-scale release, though logistical feasibility remains in question. More surprisingly, Pasent indicated the possibility of lifting some sanctions on Iranian oil shipments, despite being at war with Tehran, a move that drew criticism from traders accustomed to navigating strict restrictions on Iranian deals.
Other efforts to contain prices include easing restrictions on Russian oil already at sea, and speculation that the U.S. Might intervene in futures markets – a suggestion Pasent denied. High volatility has also limited the size of positions traders can take, capping futures prices, but its impact is limited compared to the disruption in the Strait of Hormuz.
Christof Rühl, global head of research at Crystol Energy and a former BP economist, told Bloomberg Television, “The U.S. Has pretty much exhausted its toolkit to stop prices from going up, given this level of uncertainty. If the Strait doesn’t open and the uncertainty around actual damage isn’t removed, there isn’t much they can do.”
The strain is visible across the supply chain. Container shipping companies are adding fuel surcharges, and volatile shipping fuel markets are prompting some buyers to delay large orders due to price fluctuations. In the United States, gasoline prices at the pump are nearing $4 a gallon, whereas diesel has surpassed $5. In Germany, a heating oil dealer reported customers are only buying “when absolutely necessary,” and airlines have cancelled some flights due to rising jet fuel costs.
Pavel Kvitkin, CEO of Girteka Logistics, one of Europe’s largest trucking companies, said, “Energy market moves are transferring to our costs almost immediately,” adding that fuel accounts for approximately 30% of the company’s transportation costs.
In a sign of the frantic race to secure physical barrels, the price of Oman crude, a Middle Eastern benchmark, rose above $162 a barrel this week, while the UAE’s Murban crude exceeded $145. Asian buyers have increased shipments of U.S. Oil to a three-year high, seeking alternatives to constrained Middle Eastern supplies.
As the conflict enters its fourth week, Iranian officials have grow reluctant even to discuss reopening the Strait of Hormuz, focusing instead on withstanding U.S.-Israeli attacks, according to a source involved in high-level direct communications with Tehran Friday.
“We do not see any letup in the escalating energy crisis as more energy facilities come under attack,” said Helima Croft, an analyst at RBC Capital Markets, in a note. “Administration officials have spent hours trying to convince market participants that the disruption will be short-lived with the war coming to a close. But nothing suggests that the engagement will be limited at this stage.”
