Brent Near $110 Despite Gulf Exports Topping Prewar Levels

Key Points

1. Brent crude trades near $110 a barrel even as Persian Gulf exports exceed prewar volumes.
2. Traders are pricing in possible renewed US strikes on Iran after next week's midterm elections.
3. JPMorgan's model puts fair value at $94, implying a large risk premium.

The latest:

Brent crude climbed back to around $110 a barrel this week, a level last seen in late April when Persian Gulf exports ran at roughly half their current volume. Traders and analysts told The Wall Street Journal the rally reflects fear of renewed escalation with Iran, depleted global inventories and a patched-together shipping system that is both dangerous and expensive. The most active contract traded at $111 early Thursday.

Details:

• The exports: Persian Gulf oil exports, including shipments through Hormuz and alternative regional routes, recovered to more than 24 million barrels a day in the week through Oct. 18, above the prewar level of 23.3 million, according to ship tracker Kpler. That pace proved hard to hold: exports fell to at least 15.7 million barrels a day in the week through Oct. 26.
• The risk premium: Goldman Sachs estimates fears of renewed supply disruption have added about $27 a barrel to Brent, with refiners buying while supplies are available and investors buying futures to hedge against an energy shock. JPMorgan’s Natasha Kaneva said the model fair value is $94, far below where the benchmark trades.
• The US escalation: Investors worry Washington could resume strikes on Iran after next week’s midterm elections, triggering another round of Middle East supply disruptions. The Journal reported the US has told several Gulf Arab countries to prepare for a short, intense military campaign once the vote passes — a scenario far more plausible than in April and May, when a ceasefire held.
• The shipping squeeze: A record number of commercial shipping attacks near the Strait of Hormuz this month has made the export recovery fragile. Giovanni Staunovo, commodities strategist at UBS, said the rebound coincided with a sharp deterioration in maritime security, with vessels exposed to attack and insurance and freight costs rising sharply.
• The freight cost: Attacks on tankers and infrastructure, including a vital Saudi pipeline, have forced exporters onto alternative pipelines and heavy use of ship-to-ship transfers. Shipping crude from the Gulf to Asia cost nearly $36 a barrel in early October, more than five times prewar levels, according to the International Energy Agency. Analysts disagree on whether that is feeding into Brent.
• The Sinokor threat: Iran’s Persian Gulf Strait Authority, a newly created agency requiring shipowners to register before transiting Hormuz, singled out South Korea’s Sinokor on Tuesday and warned of unspecified legal action against all its vessels from Nov. 1. Sinokor-owned ships accounted for more than a fifth of identified tanker traffic through the strait over the past three months, per Kpler.
• The thin buffer: Global on-land oil inventories that could be readily drawn were near their lowest since at least 2016, according to the latest IEA figures. Morgan Stanley analysts wrote that even with Middle East exports rising, total supply to the market, including deliveries to domestic refineries, remains below last year’s levels.
• The China factor: China, the world’s biggest oil importer, cut monthly crude purchases to multiyear lows earlier this year, slashing imports by 3 million barrels a day in May and June — roughly the combined daily consumption of Italy and France — which helped hold prices down. Imports have risen since bottoming in June, and ship-tracking data suggest October purchases rose again.
• The pump price: US regular gasoline averaged $4.25 a gallon as of Wednesday, according to AAA. Prices have eased in recent weeks but have stayed largely above $4 since April, leaving drivers with little relief from the crude rally.

Background:

The war with Iran is in its eighth month. A ceasefire in April and May had the US and Iran moving toward a peace deal before talks collapsed, and exports then ran at roughly half current levels.

Between the lines:

The gap between JPMorgan’s $94 fair value and an $111 market price is the clearest measure of how much of this rally is politics rather than barrels. Supply has recovered on paper, but the Oct. 26 drop to 15.7 million barrels a day shows the recovery is not durable, and with inventories near 2016 lows and China buying again, there is little cushion left if strikes resume.

What’s next

Watch next week’s US midterm elections and any resumption of strikes on Iran afterward. Nov. 1 is when Tehran’s new strait authority says action against Sinokor vessels begins. Weekly Kpler export data will show whether the rebound holds.