There is a high risk being short energy and betting on any immediate political resolution in the Iran conflict, according to Ole R. Hvalbye, Commodities Analyst at Skandinaviska Enskilda Banken AB (SEB).
In a report sent to Rigzone on Friday, Hvalbye pointed out that the Brent front-month price was at $106.3 per barrel this morning, “close to a weekly high and a $9 per barrel jump from Monday’s open”.
“This is the move we flagged as a risk earlier in the week: the market shifting from ‘a deal is around the corner’ to ‘this is going to take longer than we thought’,” he added.
In the report, Hvalbye noted that, during April, “rest of year Brent remained remarkably stable around $90 per barrel”. He outlined that this stability rested on one single assumption – that the Strait of Hormuz reopens around May 1.
“That assumption is now slowly falling apart,” he warned in the report.
“Every week of delay beyond 1 May adds (theoretically) … [around] $5 per barrel to the rest of year average, as global inventories draw 100 million barrels per week,” he added.
“A mid-May reopening implies rest of year Brent closer to $100 per barrel, and anything pushing into June or July takes us meaningfully higher,” he continued.
Hvalbye went on to state in the SEB report that “the complexity is large, and higher prices have only just started (given a scenario where the negotiations drag out in time)”.
“The market spent April leaning on the $90 per barrel rest of year assumption; that case is diminishing by the hour,” he warned.
In a market statement sent to Rigzone on Thursday, Naeem Aslam, CIO at Zaye Capital Markets, highlighted that Brent was holding around $102-$103.30 per barrel, “keeping the market firmly above breakout levels and confirming that oil is now trading on structural constraint, not just headline emotion”.
“The indefinite Iran ceasefire extension has reduced immediate escalation risk, but the naval blockade, ongoing Strait of Hormuz disruption, and lack of any clear reopening timeline continue to block supply normalization, leaving a persistent risk premium in place,” he added.
“That tension explains why crude has stayed elevated despite a softer geopolitical tone: war risk has eased, but system stress has not,” he continued.
“At the same time, tighter balance expectations from major energy agencies, limited spare capacity flexibility, and continued sensitivity to any fresh disruption are keeping the floor under prices,” Aslam went on to state.
Commodity Markets Always Forced into Equilibrium
In practical terms, commodity markets are always forced into equilibrium – the market must clear.
That’s what J.P. Morgan analysts, including J.P. Morgan’s head of global commodities strategy Natasha Kaneva, said in an oil flash note sent to Rigzone by Kaneva late Thursday, adding that, for physical commodities, “the daily accounting is straightforward: supply + inventory withdrawals = consumption + inventory builds”.
“If production falls short of desired demand, the gap can’t persist. The system adjusts first through spare production capacity, then through inventory draws. As inventories tighten, prices rise to ration consumption,” the analysts added.
The J.P. Morgan analysts said in the note that, in accounting terms, flows must match almost in real time. They did however add that, in economic terms, “prices can be far from equilibrium as they move sharply to whatever level is needed to restore balance”.
“Oil is the clearest example because short-run demand is relatively inelastic: transportation still needs gasoline and diesel, airlines still need jet fuel, and petrochemical plants still need feedstock,” the analysts went on to note.
“As a result, even a modest supply loss can produce outsized price moves as the market rations scarce barrels,” they added.
“In a major disruption, the balancing sequence typically runs as follows: spare capacity is activated first; inventories are drawn next; then emergency releases and refinery run cuts follow; and, finally, higher prices force demand lower,” they continued.
“The closure of the Strait of Hormuz should be a clear example of this dynamic. Yet, something is off,” they highlighted.
Outlining their “math” in the note, the analysts said the disruption to global supply totaled 9.1 million barrels per day in March and widened to 13.7 million barrels per day in April. They said, however, that “the first balancing lever, spare capacity, failed to engage”.
“Nearly all of the world’s spare capacity is concentrated in Saudi Arabia and the UAE, and it was effectively cut off from global oil markets, stripping the industry of its traditional shock absorber,” the analysts pointed out.
“In the U.S., the world’s marginal supplier, even a sharp price increase cannot translate into immediate shale growth at this scale,” they noted.
The analysts highlighted that, “with spare capacity constrained, the second lever, inventories, was activated almost immediately”.
“We estimate that observable commercial and strategic inventories drew by 4.0 million barrels per day in March and an extraordinary 7.1 million barrels per day in April”.
“We do not have full visibility into all inventories, particularly product stocks, so it is entirely possible that actual draws are materially larger than what is currently visible in reported data,” they said.
The analysts noted that demand buckled as well.
“Observed global oil demand fell by an average of 2.8 million barrels per day in March and is tracking a larger 4.3 million barrel per day decline so far in April”.
“To put this in perspective, demand erosion at the peak of the Global Financial Crisis in January 2009 was on the scale of 2.5 million barrels per day as recession and weaker industrial activity weighed on consumption,” they added.
“What is striking is that these losses have occurred at prices that do not appear extreme by historical standards … prices do not seem high enough on their own to explain a drop in demand of this magnitude, or one that has unfolded this quickly,” they highlighted.
“This suggests that much of the decline is not traditional, price-driven ‘demand destruction’ but rather forced demand loss caused by missing supply,” they said.
“Put differently, physical shortages are constraining actual consumption, so what appears to be demand destruction is a supply loss showing up on the demand side of the ledger,” they pointed out.
The analysts stated in the note that this distinction matters “because it changes how we interpret the rebalancing now underway”.
“If roughly 14 million barrels per day of supply has been removed, and even assuming an aggressive eight million barrel per day contribution from inventory draws, the market would still need to clear an additional two million barrels per day through lower demand or through even larger inventory draws,” the analysts highlighted.
They went on to note that this is too large to be absorbed by emerging markets alone.
“In practical terms, Europe and the U.S. would also need to participate. For that to happen, prices would likely need to rise further,” they said.
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