Oil prices rebound as Iran conflict grinds on

• Strait of Hormuz remains blocked
• Brent crude up 4% to $91
• Oil storage ‘is getting full’

Oil prices rebounded on Wednesday as Iran’s near-total closure of the Strait of Hormuz remained in force despite US pledges to reopen the channel to shipping.

US Central Command said on Tuesday that it had “eliminated” 16 mine-laying boats near the channel, following President Donald Trump’s vow to restore shipping. However, ship-tracking websites show few vessels in the area on Wednesday. 

At 11:17 GMT, Brent crude futures were up 4 percent at $91 a barrel and West Texas Intermediate was up 4 percent to $87.

The two contracts had ended Tuesday at $88 and $83 respectively after trading in near 20-percent ranges. Wednesday is proving less volatile, with prices moving within an 8 percent spread.

About 20 percent of global oil and liquefied natural gas supplies are transported through the narrow strait, which marks the entrance to the Arabian Gulf. Iran has halted most maritime traffic as part of its response to US-Israeli attacks.

Brent crude surged to nearly $120 on Monday before retreating. It is up 30 percent since before the conflict. Initially, however, oil price moves had been relatively muted.

The market “didn’t panic on day one, with futures positions and options all indicating the market didn’t foresee this being a prolonged conflict”, said Caroline Bain, founder of London’s Bain Commodities Research.

“What we’re seeing now is the realisation that even if the war were to end today, it will take weeks for these Middle East production facilities to return to full operating capacity. The disruption is real – it’s not just a risk any more.”

The halting of tanker traffic has forced wide-ranging production cuts. Saudi Arabia, Kuwait, Iraq and the UAE have reduced output by up to 6.7 million barrels per day, Bloomberg reported. This amounts to about 6 percent of daily worldwide consumption according to AGBI calculations based on Opec data.

“Oil production has slowed because storage is getting full,” said James Noel-Beswick, head of commodities at Geneva’s Sparta Commodities.

“You can’t ramp up or restart production with a flip of a switch. Even if hostilities end, will shippers immediately feel safe to resume tanker transit through the strait again? Not in the same numbers as previously.”

Oil prices retreated from late Monday onwards on reports the International Energy Agency was proposing the largest coordinated release of crude from countries’ strategic reserves. 

The IEA has recommended the release of 400 million barrels of oil from reserves and on Wednesday said Germany had confirmed it was willing to participate in such a move.

“We will comply with this request and contribute our share, because Germany stands behind the IEA’s most important principle: mutual solidarity,” economy minister Katherina Reiche said, according to Reuters.

The G7 could feasibly release about 1.2 million bpd, JPMorgan analysts have said. Yet this would do little to ease supply constraints, with production cuts of crude and related products probably rising to 12 million bpd within the next two weeks unless the strait is reopened, the analysts forecast.

As such, the release of these reserves “would not materially ease a shortfall” and “would likely provide only initial relief” while cargos that set sail before the war started “are still arriving”, they said. 

“Once those shipments clear and new loadings fail to depart, a 1.2 million bpd release would be insufficient to counter potential [production] losses.”