“About 30-40 million barrels of Iranian oil is sitting in floating storage off China, ”
The market tends to price in anticipated geopolitical risks rather than actual lost barrels
That’s why we initially saw a $10 spike in flat prices last week, only to see them settle much lower. The prevailing view is that the Strait of Hormuz will remain open. However, the situation is more serious than many think. My concern is that the U.S. might eventually get involved. Just before the recent attack, Senator Lindsey Graham said that if diplomacy fails, it would be in America’s national security interest to go “all in” to support Israel. If this escalates, U.S. military engagement becomes very real. In this scenario, China could be the biggest loser. It imports nearly all of Iran’s oil and is highly dependent on Iranian LPG, which fuels Asia’s pressured petrochemical sector. If I were a trader, I’d be covering shorts, or even going long. Prices are just $5 above prior levels, at around $69, a modest rise, given the risks.
Can we expect leaders gathering at the G7 summit to play a de-escalating role?
There will be intense pressure on Donald Trump to rein in Netanyahu, who seems to be the only one who is benefitting here as he’s trying to avoid jail. Iran isn’t prepared for this war. The U.S. and Europe don’t want it either, it’s hitting at a terrible time economically. The World Bank recently downgraded global GDP forecasts from 3% to 2.3%, even before the conflict. Inflation is rising, driven by Trump’s tariffs and U.S. yields are high, limiting the Fed’s flexibility. Meanwhile, China’s economy is sluggish with a weak CPI and refinery throughput at post-COVID lows.
Given Asia’s reliance on Gulf oil, why aren’t we hearing more alarm from that region?
Asia consumes most of the Gulf’s 25 million b/d. But they’re calm for now because the spot market was well-supplied before the conflict. And about 30-40 million barrels of Iranian oil is sitting in floating storage off China. Nigeria’s surplus was absorbed by Asian buyers, mainly India. Their next fallback is U.S. crude. Meanwhile, shipping costs are rising and insurance premiums have already spiked. For a VLCC, that’s an extra $0.50 per barrel, or $500, 000 per shipment. That will bite eventually.