Goldman argues the oil market is 'adapting' to the conflict
The war in Iran has reached the six-month mark, and Wall Street strategists are assessing the way forward for oil prices.
On the six-month anniversary of the war in Iran, divisions are apparent on Wall Street about the trajectory for oil prices, with some arguing markets may be a little too sanguine about the potential for further spikes.
"From the moment President Trump told CBS News on March 9 that 'I think the war is very complete, pretty much,' a corner of the market has held a steadfast belief in an imminent end to the war," said a team of strategists at RBC Capital Markets led by Helima Croft.
Throughout the monthslong crisis, though, the strategists said they've been flashing back to the 2003 Iraq war and then Defense Sec. Donald Rumsfeld's comment that "it could last six days, six weeks, I doubt six months." The conflict lasted nearly nine years.
Front-month Brent crude (BRN00) slipped 0.5% on Friday to trade at $88 a barrel, which is about $18 higher than seen at the start of the war in late February. However, the global oil benchmark is well down from a 52-week high reached March 31, when it hit $118.35 a barrel.
Front-month West Texas Intermediate crude (CL.1) was down 0.7% to $82.92, which is well above around $66 a barrel, seen before the conflict began. Yet it's off 26% from a 52-week high of $112.95 reached April 7. Both Brent and WTI are headed for weekly losses of roughly
Noted by Croft and her team was a lift in oil exports out of the Strait of Hormuz last week - 1 million barrels per day above the four-week average, thanks to U.S. naval escorts, via such operations as ship-to-ship transfers. However, given Houthi attacks in the Red Sea, RBC estimates around 8 million barrels per day of Middle East oil remains disrupted.
Crude exports out of the Middle East have been picking up, says RBC Capital Markets.
The strategists said it's unclear that the U.S. administration will want to maintain a permanent Middle East naval escort service that's been helping more oil get out - "a critical unknown at this juncture."
"Hence, we suspect that we will be writing another anniversary note come February, even if the conflict remains primarily a grey-zone one, and the Strait remains in a Schrödinger situation," the strategists said.
As for the persistent stalemate in trying to reach a deal to end the conflict, traders largely dismissed U.S. threats of "economic D-Day" this week against Iran, which has reportedly been drawing up new conditions to reopen the Strait of Hormuz and talking with Oman about opening a corridor of the strait.
To date, Iran's insistence on accessing billions in frozen funds, a full removal of sanctions, a $300 billion reconstruction facility and formal operational control over the straight, remains a roadblock to any agreement, said Croft and her team.
"Similarly, we are skeptical of how the Iran-Oman maritime corridor negotiations will yield a deal that is acceptable to Washington if it codifies a Tehran tollbooth," they added.
While some oil has managed to make it to the market, Croft said they are more worried about liquefied natural gas, which is "stranded with transits near zero" at the six-month mark of the conflict. "Diesel and European gas markets look set for a serious stress test as summer sunsets, given the ongoing attacks on both Middle Eastern and Russian refineries as well as the sustained loss of Qatari LNG exports," they said.
That's one point that Goldman Sachs agrees on. "We continue to see greater price upside to European natural-gas prices and deferred oil product prices in persistent disruption scenarios than for crude," said the said a team led by co-head of commodities research, Daan Struyven, in a note to clients late Thursday.
The margin that oil refiners demand for producing gasoline, heating oil and diesel has been rising to historic highs, pressuring for one prices of petroleum products used by U.S. consumers.
As for crude, Struyven and his team estimated that oil leaving the Gulf via all modes is roughly at 15 to 16 million barrels per day, which is 7 to 8 million barrels per day below pre-war levels, but 5-6 million barrels per day above the March trough. They said more tankers have been leaving the Strait of Hormuz and Persian Gulf with transponders turned off - known as "dark crossings" - with satellite coverage limited and ship-to-ship transfers increasing.
"The rise in dark crossings by specialized shippers and in ship-to-ship transfers shows that producers and shippers are adapting to the Mideast conflict," said a team led by Daan Struyven in a note to clients on Friday.
While shipping markets continue to price in disruptions well into 2027, "potential additional dark flows and price-sensitive China net crude imports may moderate the upside to crude oil prices even if Mideast disruptions last longer."
-Barbara Kollmeyer