Oil prices dip from one-week high on Iran war uncertainty

Oil prices fell on Monday, having hit one-week highs in early trading, due to uncertainty over the likely duration of the Iran war and the near-closure of the Strait of Hormuz.

Iran has halted most maritime traffic in the narrow channel – through which about 20 million barrels per day (bpd) of crude and related products would normally transit – forcing many countries including Kuwait, Qatar, Iraq, the UAE and Saudi Arabia to reduce daily hydrocarbon production.

Brent crude was down 0.5 percent at $103 a barrel as of 13:28 GMT, having topped $106 in early Monday trading. Even with its subsequent decline, Brent is still up 43 percent – or $31 – since the US and Israel launched strikes on Iranian civil and military infrastructure on February 28.

US West Texas Intermediate was down 3 percent at $94, slipping from an intraday peak of almost $100. The two oil benchmarks have traded in ranges of more than 5 percent on Monday, underscoring the market volatility during a period of unprecedented supply uncertainty.  

Brent’s current price is “too low”, said Neil Crosby, head of research at Geneva’s Sparta Commodities.

“The market is incrementally pricing in all the supply problems arising from the Strait of Hormuz closure,” said Crosby. “It’s clear with each passing day that these issues are becoming ever more acute, so prices will grind higher the longer this conflict continues.”

Last week, sovereign members of the International Energy Agency (IEA) agreed to release 400 million barrels of oil from their strategic reserves, in what would be the largest ever drawdown. Yet this announcement had little effect on crude prices.

The release of the reserves equates to up to about 3 million bpd, a fraction of the crude and related products that was travelling through the Strait of Hormuz prior to the outbreak of the war.

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“The release doesn’t do much in terms of alleviating the supply shortfall, so the market reaction made sense,” said Crosby.

Should the Iran conflict persist until the end of March, Brent will probably increase to $120-$130 a barrel, said Crosby. 

“The outcomes are somewhat binary – if peace breaks out, oil prices will fall sharply, but If the war goes on for a month or six weeks, for example, then the current price is way too cheap,” he said.