The Case for Oil Prices to Stay Below $150
The U.S.-Iran conflict is wrapping up its fourth week and Brent crude oil is maintaining a price north of $100 per barrel.
OPIS acknowledges that there is no definite timeline for a conclusion, however we have recently increased our expectations for the conflict to last six weeks. Should fighting conclude after six weeks, it will potentially require up to twelve weeks of recovery and for marine transit to normalize.
The coming days will be critical as U.S. military is being staged to potentially enter the Middle East. Additionally, the U.S. and Iran have exchanged conditions for ending of the conflict.
The conflict has escalated with energy infrastructure targeted and processing damage to those facilities needs to be assessed in addition to clearing a shipping backlog. It is certainly too early to tell how much production will be lost because of hastily shut-down wells. Inspections will take time, and resources will need to be brought in for repairs.
A net loss of crude oil production and stranded marine traffic is certainly bullish for prices. Middle Eastern benchmarks such as Dubai have been trading above $150 per barrel on a spot basis because of the obvious lack of supply in the market. While there will be some influence on the Brent benchmark, we do not necessarily share the $150 per barrel Brent target that many in the market have conveyed.
Clearly, the supply situation is a concern, but policy makers have the “playbook” of how to temper demand. During the 2020 Covid pandemic global liquids demand went from roughly 98 million barrels per day to 72 million barrels per day a 26.5% drop in demand. Government imposed “lock downs” and “stay at home” policies played a role in pressuring demand lower.
Pandemic policies influenced the demand response, but the U.S.-Iran conflict is most likely to be the supply curtailment that drives the demand response, with policy expected to play a key role in parts of the world.
Asian countries are encouraging demand mitigation policies by instituting a four-day workweek and encouraging remote work to arrest demand. But there will be other policy moves that are more direct and market-intrusive.
On March 13th, OPIS reported that South Korea has told its refiners that they will be allowed only to match exports of gasoline, diesel and heating kerosene at 2025 volumes according to a notification from the Ministry of Trade, Industry and Energy. The government agency put the export cap in place in order to stabilize supply and demand in the country.
In the Western Hemisphere, and more specifically in the United States, there is likely to be a consumer-driven decline in gasoline demand. There was certainly a sharp drop in 2020, starting in March, with a recovery not seen until May of the following year. The U.S. demand declined during that period, which was, of course, a function of “stay at home” policies. The U.S. government nor companies that are encouraging a return to the office are likely to tell workers to stay at home. However, consumers, faced with high retail gasoline prices, will play a role in reducing gasoline demand. This is likely to be similar to 2022 when prices reached an all-time high in June at just over $5 per gallon. According to monthly EIA data from June through December 2022 gasoline demand was down versus the year prior with some months as high as 5% attrition.
— Reporting by the OPIS Energy Marco Services team