Oil prices edged lower on Thursday but remained above the $100-a-barrel mark, with Brent crude trading 1.18% lower at $102.18 a barrel as markets weighed the latest developments in the Iran-US conflict and the risk of disruptions to global oil supplies. According to NDTV Profit, crude oil prices had snapped a five-session losing streak in the previous session, with Brent rising 3.9% to settle at $103.08 a barrel and US West Texas Intermediate (WTI) gaining 1.8% to settle at $92.16. The rebound came after Iranian President Masoud Pezeshkian vowed that the Islamic Republic would not surrender to the US in his address to the United Nations General Assembly on Wednesday, stating "They have tested the strength and the steadfastness of Iran and they have learned that Iran cannot be made to surrender."
The price gains reflect growing optimism about potential diplomatic resolution of the US-Iran conflict, with US President Donald Trump saying on Tuesday that US officials had a "very good meeting" with Iran's delegation, which lasted about three hours. According to The Hindu BusinessLine, US President Donald Trump said earlier this week that he would be open to meeting Iranian President Masoud Pezeshkian, who is expected to attend the UN General Assembly this week. An Al Jazeera report stated that Iran has conveyed its conditions to mediators for re-engaging in negotiations with the US. As per KCM Trade chief market analyst Tim Waterer, "Traders who were positioned for further downside are taking some risk off the table while the diplomatic narrative plays out." Trump also urged Iran to make a deal, claiming he called Tehran to negotiate many times, as reported by NDTV Profit. The Whitehouse is signaling a diplomacy route as US President is expected to meet Iranian President today, which would be most looked forward event for the street, while US President taking a last-minute U turn from attacking Houthis in Yemen is also signaling the way for diplomatic resolution among the major stakeholders in the war.
Reuters reported on Tuesday that Iran could reopen the Strait of Hormuz within a week if the US agrees to ease military pressure and lift its blockade of Iranian ports. The Strait of Hormuz is a key oil shipping route, with any disruption potentially affecting global crude supplies. The geopolitical uncertainty has added to concerns over potential disruptions to crude supplies, particularly given the strategic importance of the Strait of Hormuz to global oil shipments. Markets are therefore balancing the risk of supply disruptions from the Iran-US conflict against the possibility of de-escalation and a reopening of the crucial shipping route. Despite Wednesday's rebound, crude remains under pressure this week, with US oil prices down around 8% on the week and Brent declining nearly 1%.
The global cost of carrying crude oil which used to be around 1-2 per cent of the total contract value has now faring 20-25 per cent to Asian refiners as the world experiences acute shortages of supertankers with capacity of 2 million barrels. As the western sanctions on dark fleets which used to carry sanctioned Iranian, Russian, and Venezuelan oil are on sidelines, which makes the available fleet short of meeting the global crude oil demand. Renting one giant oil tanker from Middle East to Asia now costs over $1.2-1.4 million per day, compared to much less a few months ago. Shipping oil from US to Asia now costs $26 extra per barrel, adding $52 million to single shipload that shipping cost equals 25 per cent of oil price itself. Around 15 per cent of the global VLCC fleet is now off Oman, with tankers tied up in ship-to-ship transfers or rerouted around the Cape of Good Hope. The lack of capex done in the shipping industry in last four years has led to current situation and the news ships would take 2-3 year to come online, hence we expect the transit cost will remain higher for longer even if crude oil prices have to fall in coming months.
Global refineries remain a choke point with product shortages expected to remain a major concern for policymakers as gasoline, diesel, and fertilizers prices would be a direct feed to inflation index. US diesel prices reached $6.4/g and at some pump stations it touched high of $7/g. Saudi Arabia suspending crude oil cargoes for September and October meaning the Yanbu pipeline will take much longer for repair with increased risk of further attacks. Ukraine continued to attack Russia infrastructure that has shunned Russia 50 per cent of refining capacity till mid-September pushing Russia to extend the Diesel export ban, which has kept the European middle distillate higher. Europe will see a fourth-quarter jet fuel deficit of 510,000 barrels per day, against surpluses of 18,000 bpd in the United States and 419,000 bpd in Asia-Pacific. The third-quarter trend is largely the same. South Korea in September has become the latest large source of jet fuel shipments to Europe, with European imports of the fuel from the Asian nation standing at 129,000 barrels per day so far in September. China exported 6 million tons of petroleum products in August up by 53 per cent from July, while South Korea's jet fuel output for July hit a seven-year high of almost 13.89 million barrels, with exports reaching a 3-1/2-year high. Indian refiners are also expected to load higher tonnes to European markets to capitalize on the higher crack's spreads, as India's petroleum basket has 70 per cent weight of middle distillate as world is running short of roughly 3.5-4 million barrels of refining capacity.
The optimism surrounding diplomatic talks could see oil prices trading under pressure in last couple of trading sessions, however the spot market trades at 15-20 per cent premiums to Brent prices, shows the elevated risk in ME. Supply demand balance is still in short of 3.5 million of supplies, which is expected to improve in Q4 only if US-Iran standoff find a resolution. However, risk of escalation from Iran ahead of Midterm elections to move oil higher in short term. Brent could test support of $95 but the prolonged standoff would mostly be seeing oil moving towards $110-115 by October end. The oil market remains focused on developments between Washington and Tehran, with markets balancing the risk of supply disruptions from the Iran-US conflict against the possibility of de-escalation and a reopening of the crucial shipping route through the Strait of Hormuz.
