As has become almost customary at this point, the US-Iran war shifted over the weekend. This time it was an escalation in the conflict, with both the US and Iran striking ship in and around the Strait of Hormuz. The attacks on shipping threaten to curtail shipments through the contested waterway that have been slowly resuming over the last few months.
Although officially the waterway remains closed, there have been reports of increased transit as ships turn off trackers to avoid attacks. The strikes over the weekend seem to threaten that process, putting not just crude tankers are risk but other bulk carriers as well. Beyond the price of energy, inflation pressures are a concern given the key role the region plays in producing raw materials such as plastics, petrochemicals and fertilizers.
The Market Fundamentals Are Shifting
Aside from the short-term moves in crude driven by the unpredictable turns in geopolitics, the underlying market is still paying close attention to the data. The ups and downs depending on whether Iran attacks more ships or Trump threatens devastating strikes or announces talks are still coming off of a fundamental baseline.
While the war is put a premium on crude prices, there is a growing consensus of a building supply glut as soon as shipments in the Strait of Hormuz are resolved. And that resolution might not even be an end to the war, but increasing mechanisms to ship around chokepoints like between Oman and Iran as well as the Red Sea. That also includes increasing Russian shipments around international sanctions. Ukraine has been pummeling Russian distillate storage and refining capabilities, which pushes up domestic prices and constrains supply to consumers. But that only increases the amount of crude Russia has available to export, and needs to export in order to import refined products.
Data That Could Move the Market
On Tuesday, the American Petroleum Institute (API) will publish its survey of US-based crude inventories ahead of the Energy Information Administration’s (EIA) report on Wednesday. That is followed on by the OPEC’s Monthly Oil Market Report (MOMR) later on Wednesday. This latter is notable coming after the OPEC+ meeting which agreed to hold production steady in October, ending a series of production increases over the last several months.
Investors will be paying close attention to OPEC’s MOMR, particularly it’s demand supply forecast. The International Energy Agency (IEA) has repeatedly warned that there is likely to be an excess of supply as demand for crude declines and production increases. OPEC has generally been adjusting its forecasts to align with a similar prediction. Investors will note if OPEC’s forecasts reduce demand projections for the sixth time in a row.
Transition or Demand Destruction?
Waning demand is a key issue for the global market amid OPEC’s declining relevancy. US production continues to rise, and there is now a deal to substantially increase Venezuela’s output. In the face of higher supply outside the Persian Gulf, it’s a vital question whether the drop in consumption is due to the expected transition into renewables reducing the need for crude, or higher prices due to the war reducing demand. Likely a combination of both, but the respective weighting could be more important for the medium-term trajectory for crude.
If OPEC revises its demand outlook lower again, crude could retreat amid ongoing war-related pressures. But an affirmation in the outlook combined with another unexpectedly large draw in API could give crude a boost.
