The oil futures paper market is likely underestimating the massive supply disruption that a closed Strait of Hormuz is creating in physical crude and fuel supply globally.
Crude futures prices briefly spiked early this week to $119 per barrel, before retreating to the $90s and trading at $100 a barrel early on Friday in Asian trade.
However, the premium of physical Dubai crude has surged to $38 per barrel over its paper equivalent, according to data compiled by Reuters columnist Clyde Russell.
The wide gap between paper and physical prices suggests that supply is being immediately choked off.
But traders on the paper market appear to believe that the record-high emergency stocks release and the U.S. Administration’s scrambling to calm the markets with comments that the war will end soon would ease the upward pressure on oil prices.
Analysts started expressing views that $200 oil is not a fantasy anymore—with 20% of global oil supply choked at the Strait of Hormuz buyers are racing to procure physical cargoes, refiners in Asia consider cutting processing rates, and Asian countries restrict fuel exports.
As a result, jet and diesel cracks soared to never-seen highs, leaving entire regions such as Europe in a shocking shortfall of middle distillates.
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Hours after announcing the biggest-ever coordinated emergency release of oil stocks, of 400 million barrels, from reserves, the International Energy Agency warned that the Middle East war is creating the biggest supply disruption in the history of the oil market.
The IEA-coordinated release will take weeks and possibly months to reach the market. The U.S. release of stocks as part of the IEA action will take about 120 days to complete, ING’s commodities strategists Warren Patterson and Ewa Manthey said.
“If you assume a similar timeline for other countries, that works out to 3.3m b/d – far short of the supply losses we are seeing from the Persian Gulf,” they noted.
With limited capacity available to bypass the crucial Strait of Hormuz and storage filling up, Gulf producers have slashed their combined oil output by at least 10 million barrels per day, the IEA said in its monthly Oil Market Report on Thursday.
In addition, over 3 million barrels per day of refining capacity in the Gulf region has already shut due to attacks and a lack of viable export outlets.
“Runs elsewhere will be increasingly limited due to feedstock availability,” the IEA warned.
