SerpApi.Org
The price of crude oil is a broken barometer. Acute pain in the world energy market has switched to the trio of refined products that we actually consume: diesel, petrol and jet fuel.
The IATA jet fuel index for global airlines has hit $154 a barrel in Europe and $149 in North America, almost double the cost of underlying crude. In trade parlance, the “crack spread” has gone mad.
It is arguably worse for diesel. The spread over crude has reached $80 in Rotterdam and $88 in New York, the highest since records began.
The whole global market is seizing up.
“I’ve never seen an energy environment this stretched,” said Jeff Currie, perhaps the world’s best-known oil guru.
We have been lulled into complacency by deceptively moderate oil headlines and by assumptions that the Iran war has settled into a low-intensity management problem. It is nothing of the sort.
The immediate risk as fighting returns to near-full-blown war is that Donald Trump will attack Iran’s energy plants, bridges and civil infrastructure, prompting Iran’s Revolutionary Guards to retaliate by hitting Saudi pipelines and port facilities.
The pro-Iran Houthis in Yemen have just upped the ante by declaring a “maritime embargo” on Saudi shipping. It is not yet clear how far this goes but it raises the spectre of a double blockade of both the Strait of Hormuz and the Red Sea, threatening the export escape valve for Saudi oil. The Houthis have shown in the past that they can hit the Saudi Red Sea terminal at Yanbu.
Those in Washington who still think that Iran can be bombed into submission are a dwindling and discredited number. The conflict is reaching the point where Trump must either accept de facto defeat and the worst US foreign policy humiliation of modern times or raise the strategic stakes in a fateful gamble.
Nate Swanson, a former US negotiator with Iran and now at the Atlantic Council, says political momentum is increasing for a US land invasion: “You can feel it building around you.
“The only thing that would actually lead to a regime change or a significant change in Iran’s approach is a massive ground campaign, kind of à la 2003 Iraq,” he told Foreign Policy.
“I think that would be a disaster but I don’t see how these half campaigns will change Iran’s calculus.”
Iran has four times the population of Iraq and a cohesive military machine. War planners think it would take several hundred thousand US troops and months of counter-guerrilla warfare in the mountains to cut off Iran’s drone and strike capability against Gulf shipping. Even that might fail.
I hope Andy Burnham is paying attention because these events, so far from the little world of Manchester, threaten to play havoc with everything he plans for Downing Street.
We enter round two of Trump’s war with exhausted buffers. Global oil inventories are already at rock bottom, approaching the operational stress levels of the industry.
The unpleasant realities were laid bare at the latest Aspen Security Forum, to the irritation of US officials struggling to talk down futures contracts.
Fatih Birol, the head of the International Energy Agency (IEA), has said the only reason crude prices were trading in the high 80s rather than at $200 was because of one-off emergency measures that could not be repeated at scale. He said the remaining margin would run out within weeks.
The US energy department says commercial oil stocks at the vast pipeline hub at Cushing, Oklahoma – the biggest fuel storage depot in the Western world – are reaching “tank bottom” levels where the remaining oil is unusable sludge.
Trump launched the war before refilling the US strategic petroleum reserve to safe levels. He has been running through eight million barrels a week to hold down prices. The strategic petroleum reserve is now down to 316 million barrels, the lowest since 1983. S&P Global says the technical “floor” is in the range of 250 to 300 million, a few weeks away at the current run-rate.
Japan and South Korea released huge volumes from their reserves in April and May. That Asian supply has now dried up. There is still a cushion in several countries but the IEA member bloc cannot keep doing shock-and-awe releases without leaving themselves dangerously naked.
Oil traders say it would not take much at this stage to set off a sudden “non-linear” spike to $200 levels.
Trump more or less conceded the point when he signed the “memorandum of understanding” with Iran, admitting that he feared going down in history as a latter-day Herbert Hoover: “I didn’t want to see economic catastrophe. If you kept this going, that could have happened.”
The wild moves in the refined fuels market are already bad enough.
Martijn Rats, a commodity strategist at Morgan Stanley, says the world is facing a triple shock of drastically reduced supply from the Gulf, Russia and China, all combining to push the crack spread higher.
The Gulf war has knocked out three million barrels a day (b/d) of refined products, including half of Europe’s diesel and a fifth of its jet fuel. The tracking firm Kpler says shipping through Hormuz has all but stopped since July 15.
In parallel, Ukrainian long-range drone attacks have taken out four million b/d of Russian fuel, or 55pc of the country’s entire refining capacity.
These damaged plants cannot easily be fixed because Ukraine’s drone strike force has learned how to target the catalytic crackers and alkylation units that rely on components imported from the West.
The great surprise of round one of the Iran war in March and April was how easily China managed to cut its total oil imports by two fifths.
It has in effect displaced Saudi Arabia as the super-regulator of the global crude market, able to act as a giant shock absorber.
But one way it did this was to suspend its side-business of refining imported oil at Sinopec, PetroChina or CNOOC plants and re-exporting it for a profit as fuel across Asia.
The world lost another three million b/d of refined fuels almost at a stroke.
If you put it all together, we have lost 15pc of the world’s 64 million b/d supply of refined fuels. That is colossal.
The world economy and the energy markets have so far weathered the shock of the Iran war remarkably well, an early sign that the electrification of China and emerging Asia are already breaking the legacy stranglehold of seaborne oil and gas.
But there are limits to this resilience and there are mechanical time-lag effects in the oil supply markets.
We are moving closer to the point where crude prices suddenly spiral higher and combine with a killer kick from crack spreads.
Burnham beware.
