There is a "catastrophic" shortage of oil on the market. And even the price above $100 does not reflect it

Exchange prices for oil, which have been above $100 per barrel since the war in the Middle East began, do not reflect the real state of oil supply. Buyers are sometimes paying one and a half times as much for shipments that are bought and shipped now. Saudi Arabia is considering scenarios in which the price could rise to $180, and the White House is considering scenarios in which the price could rise to $200 a barrel.

The price of North Sea Brent has risen more than 50 percent since the start of the war and was trading at $110 a barrel on Friday, while U.S. WTI was up more than 40 percent to $96.9.

However, the Middle Eastern grade Dubai has more than doubled in price, its price a week ago exceeded $160 per barrel, The Wall Street Journal writes, citing data from Argus Media. At the end of February, it cost the same as Brent, about $72.5.

Of the other Middle Eastern grades, Murban from the UAE cost $145, while the price of a barrel of Omani crude exceeded $162, Bloomberg noted.

Oman has not suffered as much as other countries in the region, whose oil has been trapped in the Persian Gulf due to Iran's de facto blockade of the Strait of Hormuz, through which tankers are already virtually on the high seas. Oman's ports are located after the strait, so they continue to ship oil.

Brent and WTI futures are set for delivery in May, when traders hope de-escalation will occur and shipping through the Strait of Hormuz will be restored. Today, however, there is a huge shortage of physical supply in the market due to the disappearance of Middle East crude. Before the war, tankers were taking about 15 million barrels of crude oil and 5 million of refined products out of the Persian Gulf every day.

That flow, JPMorgan Chase calculates, is down 16 million barrels, the WSJ notes. Saudi Arabia has diverted some exports through a pipeline that runs east-west across the country to a port on the Red Sea. Iran officially says it has allowed Iraq, Pakistan, China, India and Russia to pass through the strait. Getting oil out of the Persian Gulf is also managed by lone tankers that either operate at their own risk or pay Iran, which has begun charging some ships up to $2 million for passage.

Another factor that plays a role in the gap between exchange prices and physical delivery prices is the composition of grades. Brent and WTI are light, low-sulfur Marks. Many Asian refineries, which were the main consumers of Middle Eastern crude oil, need crude with high sulfur content (which, in particular, produces more diesel). Now the market is in catastrophic shortage of such feedstock.

Therefore, prices of varieties similar to Middle Eastern varieties are rising.

Premiums for such Marks have reached record highs, notes the Financial Times. Among them are some grades produced in Norway, Algeria, Libya and Kazakhstan, with buyers paying an extra $5-15 per barrel compared to Brent.

A week ago, the price of Russian Urals (also high-sulfur) reached the maximum level of $121.65 in Indian ports since February 2023, Bloomberg wrote, citing Argus data. The U.S. eased sanctions, allowing for a month to sell Russian raw materials from tankers loaded until March 12 (for India - until March 5).

If just before the start of the war in Iran the discount for Urals in Indian ports (including transportation costs) exceeded $12 per barrel, now this grade is sold at a premium of several dollars to the price of Brent.

It is simply not possible to replace Middle Eastern varieties in sufficient volumes, says Ivan Matthews, Vortexa's Asia-Pacific analyst director (quoted in the FT).

Due to the chaos in the markets, not only the price benchmarks for different oil grades, but also the components of the grades themselves have gone astray. Quotes for the Dubai Mark, despite its name, now do not even include oil from the emirate of the same name. Since it cannot leave the Persian Gulf, price-tracking providers have excluded it from their calculations and take into account transactions in Oman, as well as small volumes delivered from Abu Dhabi via pipeline to the port of Fujairah, which is located after a narrow section of the Strait of Hormuz and from which tankers can go to the open sea, writes WSJ.

Another price disparity has emerged: the spread between Brent and WTI has reached a record $12 per barrel, although WTI is usually a few dollars cheaper. Its relative price is now so low because the US is far away from both the conflict in the Middle East and Asia, where there is the greatest shortage of oil and whose buyers must pay more for the long distance and long delivery from America.

The International Energy Agency (IEA) has called the events in the Middle East "the biggest supply disruption in the history of the global oil market". Not only a disruption, but "the greatest threat to global energy security in history," Fatih Birol, the IEA's executive director, added in an interview with the FT.

The agency's 32 member countries agreed to sell a record 400 million barrels of oil from strategic reserves. And this is understandable, as the world energy sector has not experienced such a shock even in 2022, Birol said. According to him, the gas supplies that the world lost due to the blockage of the Strait of Hormuz are twice the amount that Europe lost due to the war started by Russia four years ago and the severing of energy ties with it. And oil losses were greater than during the shocks of the 1970s.

But while the military action is underway, Saudi authorities are trying to figure out to what level prices could rise. If supply disruptions persist through the end of April, the baseline scenario would see prices rise above $180 a barrel, several officials in the kingdom's oil industry told WSJ.

The U.S. administration is also engaged in similar calculations. Its employees are analyzing the consequences for the economy of a price hike to $200 per barrel, Bloomberg writes, citing people familiar with the situation. According to them, modeling the impact of such a jump on the prospects for economic growth is part of the regular assessment carried out in times of tension, rather than the forecast itself. These actions help the administration prepare for possible contingencies, including a protracted conflict, the agency's sources explained.

Earlier this week, two investment banks - Citi and Macquarie - predicted that oil prices would rise to $200 a barrel if the conflict in the Middle East lasts until the end of June.

Some estimates of the consequences have already been given by the Organization for Economic Cooperation and Development (OECD), which was the first international institution to publish growth and inflation forecasts. Before the war, the OECD had planned to raise the growth forecast for the 20 largest economies in 2026 by 0.3 percentage points, but has now decided to leave it at 2.9%. Inflation is now expected to be 4%, 1.2 percentage points higher than before, with the US having the highest inflation rate of the G7 countries at 4.2%.

Inflation is transmitted to the economy from high prices not so much for crude oil as for fuel. And fuel prices have risen much more than raw materials. For example, the price of jet fuel in Europe, which cost $85-100 per barrel over the past year, jumped to more than $220 in March, Bloomberg points out.

"The U.S. has pretty much exhausted all measures that can contain price rises unless the strait is opened and uncertainty is removed" about further damage to the region's energy infrastructure, Christoph Ruhl, global consultant at Crystol Energy and former chief economist at BP, told the agency.

According to Amrita Xi, if the Strait of Hormuz remains closed, the price of Brent will eventually reach the current Middle East crude oil prices, exceeding $150 per barrel.

This article was AI-translated and verified by a human editor