Mideast Conflict: Storm in a Teacup for the Market
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The US bombing of Iranian nuclear sites was the dreaded spark that many feared would set off a regional conflagration. And yet, it all ended up being more like a storm in a teacup, at least to the markets.
In the aftermath of a muted Iranian retaliation on a US airbase and subsequent Israel-Iran ceasefire on Monday, the physical Mideast crude market has begun shrugging off much of the effects of the war.
Demand for Mideast crude, hurt in part by the leap in Brent futures prices, remains relatively soft, but market sources believe it should recover going forward. Asian refiner sources are, however, still watching the region cautiously in case violence flares up again.
Keep Calm and Carry On
On Jun. 12, the day before Israel unleashed its bombing campaign on Iran, Brent futures closed at $70.34 per barrel, which was already up by $5/bbl from a week ago. Overnight, after Israeli strikes began, it jumped by $4.84/bbl.
Brent leapt to its peak this Monday when tensions were highest after the US bombed Iranian nuclear facilities at the weekend, with the futures contract hitting $81.40/bbl.
But it closed at $70.65/bbl on Monday, down by $6.67/bbl from last Friday, even after taking into account Iran's performative retaliatory missile strikes targeting the US' Al-Udeid Air Base in Qatar within trading hours.
“It’s like nothing ever happened,” a trading source said. Broadly, trading sources at Mideast producers and Asian refiners were remarkably calm in the face of the possibility that Iran might lash out by trying to block the Strait of Hormuz.
None of the sources Energy Intelligence talked to thought such a move was likely, suggesting the seven Mideast producer and Asian refiner sources contacted had taken the measure of a deeply weakened Iran constrained by a variety of bad options. “I think Iran didn't have much of a choice,” one of them said.
This relative calm was despite the stakes being extremely high for Asia, where some of the biggest importers are heavily dependent on Mideast crude. If Iran had closed Hormuz, Brent futures could have easily spiked past $90/bbl, said an Asian refiner source.
But there was a sense that the “market doesn’t believe this will happen,” the source added. Indeed, the view when markets opened on Tuesday — after the drama in the Mideast Gulf on Monday — is that, "We're back to square one now," said a trading source at an Asian refiner that day.
Another Asian refiner source agreed, saying: “Looks like the war risk [has] really faded.” For three Asian refiner sources and a Mideast producer source, the US bombings and Iranian retaliation turned out to be more a storm in a teacup.
Still, while tensions have eased significantly, refiners are continuing to grapple with the uncertainty over whether violence might erupt again, said two refiner sources. “This is probably the biggest thing to watch out for,” one of them noted.
Demand Likely to Recover, Freight Rates Ease
In many concrete ways, however, the physical Mideast crude market has moved back toward normal. Freight rates from the Mideast to Asia had earlier spiked after Israel began bombing but are now “cooling off a bit already,” said an Asian refiner source.
When tensions were especially high last week, not many tankers were willing to venture into the Mideast Gulf, but this reluctance has since mainly gone away, he added. And even on Monday, loadings of Mideast crude were happening according to schedule.
Demand for Mideast crude in the current August-loading spot market had earlier taken a hit — partly because the spike in Brent futures prices deterred buyers, while there was also a reluctance to snap up more Mideast spot crude given the possibility those cargoes could get trapped within the Gulf, market sources said.
But Brent futures prices have since plunged, closing at $67.61/bbl on Wednesday, removing a lot of the price pain for refiners. This is close to levels that had ranged from $64-$65/bbl for much of late May to early June.
With Asian refining margins still relatively healthy and runs likely to be supported in September and October, demand for Mideast crudes should recover going forward, said three Asian market sources.
And earlier thoughts by some Asian refiners about possibly buying more arbitrage crudes as a contingency plan in case the Strait of Hormuz got shut have mostly faded, said two market sources. Many refiners likely didn’t even consider the possibility given the arbitrages were not economical to begin with, an Asian refiner source added.