The extreme rise in oil prices seen in local markets in the Middle East could give investors a glimpse of what will happen to prices in the United States and Europe if the Strait of Hormuz does not open soon.
Dubai crude oil prices hit a record high of more than $166 per barrel on Thursday, according to market data provider Platts. Brent and West Texas intermediary Cushing dates are trading near $100 after a historic rally.
The local oil market, often overlooked, is now seen as a possible harbinger of what will happen if the conflict does not end soon.
Natasha Kaneva, head of commodity research at JPMorgan, said current prices in Dubai and Oman reflect the severity of supply shortages in the Gulf region. But that doesn’t mean the U.S. market is immune from another surge, he said.
“This divergence is unlikely to persist unless the Strait reopens,” Kaneva said in a note to clients this week. “Brent and WTI will eventually push prices higher again as Atlantic basin inventories dwindle and global markets are forced to liquidate at significantly tighter supply levels.”
west texas intermediate Andy Harborn, senior oil market analyst at Wood Mackenzie, said crude oil was not seen as an ideal substitute like Oman. However, if traffic through Hormuz remains depressed, it could become an increasingly popular alternative given that buyers become more desperate.
Holmes factor
The Strait of Hormuz, a vital passage between the Persian Gulf and the sea, is where about one-fifth of the world’s oil passes through. The number of daily calls to transit has fallen from a high of more than 120 recorded earlier this year to almost zero, according to data analyzed by Charles Schwab.
Harborn said the price of crude oil leaving directly from Middle Eastern countries such as Dubai has been rising faster than crude oil such as WTI, which typically does not pass through the strait in large quantities.
“Everything depends on the duration of the Holmes closure,” Harborn said. “It’s like the entire market is updating its assumptions in real time.”
The strait is most commonly used for fuel bound for Asian countries such as China and India. Therefore, the price hike in Dubai is more pronounced in the Singapore market than in London.
At energy research firm Rystad, analysts have begun tracking London market prices in Dubai rather than the Singapore level, and using so-called swap tools. Rystad’s Susan Bell said Singapore’s prices were essentially negligible given the severe turmoil in Asian markets.
“This is almost a fictitious price,” said Bell, the company’s senior vice president of commodity markets. In other words, prices in the Singapore market, despite being widely tracked in normal times, are “a bit volatile at the moment.”
Still, Harborn said the ripple effects of Dubai Oil’s higher prices in Singapore were already being felt elsewhere. Omani crude is considered to be of the same quality as Dubai, but it is shipped outside of Hormuz, and demand is surging as Dubai shipping has all but stopped, he said.
Although global oil standards have not risen as rapidly as in Dubai and Oman, prices themselves have suffered a major shock. From the start of the war to Wednesday, Brent’s May contract soared more than 48%. Year-to-date, it’s up more than 76%.
Brent May contract, from the beginning of the year to the present
Still, Herborn of Wood Mackenzie does not expect U.S. oil to fully converge with Asian market movements once oil flows begin to normalize by late April. Rystad’s Bell also said that if WTI or Brent crude were to be priced similar to Dubai prices in Singapore, it likely would have already happened.
There’s a simpler explanation for Dubai’s premium, Bell and Harborn say. Considering its proximity to Hormuz for oil transport, transportation costs to reach destinations in the eastern part of the world are usually low. On the other hand, shipping crude oil thousands of miles away from the U.S. to these destinations would require higher shipping fees.
“The price differential between the West and Asia sends an important signal to the market,” Harborn said. “It’s telling Western countries to move their oil to Asia.”
More broadly, analysts said oil and shipping costs would rise as a result of the prolonged strait closure, creating sticker shock for consumers. Not only are drivers feeling pressure at the gas pumps, but the rising cost of fuel for trucks and boats could spill over to shoppers.
