Oil May Rise On Conflict, Fall To US$80-US$90 If War Ends By Mid-April

By Rosemarie Khoo Mohd Sani

 KUALA LUMPUR, March 18 (Bernama) -- Crude oil prices can go even higher than current levels of US$100-US$103 per barrel if the war in West Asia continues affecting passageway in the Strait of Hormuz and supply tightness becomes more acute, Kpler senior crude oil analyst Muyu Xu said today.

Crude oil prices are currently hovering at US$101-US$103 per barrel for Brent Crude while West Texas Intermediate (WTI) is around US$92-US$95 per barrel.

However, Xu said that if the war ends by mid-April, prices are likely to see a quick and sharp downward correction to US$80-US$90 per barrel.

“But if it drags on longer, oil prices would stay high or even higher as the supply tightness becomes more acute and it will take even more time for the West Asian producers to resume production,” she said in response to questions posed by host Jason Wee during the Bernama World programme entitled ‘Global Crude Oil Market Outlook Amid Geopolitical Tensions’ on Bernama TV today.

“Oil producers in the region have cut output by at least 10 million barrels per day while Iran appears more resilient than expected despite military attacks by the United States and Israel,” she said.

Xu also warned of demand destruction in Asian countries if the tight supply situation and escalating prices do not improve meaningfully in the next three to four weeks.

Demand destruction refers to the sustained decline in the demand for certain goods due to factors such as persistent high prices or limited supply, both of which are especially affecting oil consuming countries.

Elaborating on oil output by producers, Xu said that during the period of March 1-17, only about 27 million barrels of oil went across the Strait of Hormuz, with the majority of them - around 20 million barrels - from Iran.

“Other producers meanwhile only managed to ship out less than half a million barrels per day, roughly three per cent of their normal levels,” she said.

Xu said the prolonged disruption has shifted market sentiment, with geopolitical risks increasingly priced into crude prices.

“Actually, it's interesting that the market had anticipated a brief closure of the Strait of Hormuz before the war started, and many see this as the worst case scenario.

However, the vital strait is not only closed now, it has remained closed for three weeks, cutting back on supply and exerting pressure on prices.

“However, because Iran appears more resilient than what many had expected, there seems to be no quick end to this conflict, so more risk premium has been priced in, starting from initially US$5 to US$10, now to  US$15 to US$20.”

“Potentially, it can go even higher,” she said.

As a consequence, Xu said refiners in Asia are already adjusting to tighter supply conditions by sourcing alternative crude, although delivery timelines remain a challenge.

“They (refiners) are doing whatever they can to search for alternative supplies, but the problem is those barrels won't reach their refineries until one or two months later.

“At the same time, for the refineries, because they see relatively tight supply and low inventories, most of them decided to cut runs. Some, for instance, in China is down by 10 to 20 per cent and some in Taiwan or other regions might see a bigger cut,” she said.

She added that rising fuel prices are beginning to affect consumers and could weigh on demand.

“We're now seeing soaring retail petrol and diesel prices, and people queuing outside petrol stations to fill  their tanks before prices rise higher.

She reiterated that “if the situation does not improve meaningfully in the next three to four weeks, we are likely to see demand destruction in Asian countries because of the high fuel prices as well as tight supplies”.

“So, more countries may introduce measures to ration fuel consumption and encouraging people to work from home and drive less.”

Higher jet fuel prices and bunkering costs might lead to reduced air travel and seaborne logistics.

“That will hurt the international trade and economic activities,” she said.

Asked on the 32-member International Energy Agency’s (IEA) move to release the Strategic Petroleum Reserve (SPR) to the tune of 400 million barrels of oil to prevent supply disruptions, she said the move might only provide short-term relief.

The release of SPR is aimed at cooling the oil prices in the short term and plugging the immediate supply crunch, but “overall, it does little to ease the broader market issues”, said Xu.

 “Essentially, it's like using a band aid on the cracks. So apart from the headline figures, the timing and the details of the release remain largely unclear.”

Kpler is a subscription-based data and analytics platform that provides real-time intelligence on global commodity flows, maritime operations and trade markets.

-- BERNAMA