Has the oil market changed forever following the U.S.-Iran conflict? If so, why?
These were the questions Rigzone posed to several oil and gas analysts to try and find out if the oil industry will undergo lasting changes as a result of the recent conflict.
In response, Jamie Webster, Partner and Director at Boston Consulting Group’s (BCG) Center for Energy Impact, told Rigzone that the oil market has changed forever, adding that there are “three big macro changes that are underway”.
“How energy moves is being rewired and permanent changes will take place,” Webster told Rigzone, outlining one of these changes.
“Asia will no longer take ~86 percent of ME oil, we are already seeing significant changes in trade flows and some of these will become permanent (hysteresis to use the economic term),” he added.
Outlining another change, Webster said “the energy transition is alive and well and accelerating in various ways with the crisis”.
“The most visible is China’s nimble and pragmatic approach but electrification is also accelerating everywhere (except the U.S. when it comes to EVs),” he added.
Noting a third change, Webster said “energy security, or as some put it energy resilience, is a permanent fixture and this means a greater willingness to pay for energy to ensure it is there”.
“This means revamped SPR type programs in many countries, more diversity of supply sources, and a push for efficiency of fuel use,” he added.
“This is the theme for the upcoming ADIPEC and after Ukraine and now Iran there is a recognition these are not just one-off events you can shrug off,” he warned.
Also responding to Rigzone’s questions, Benjamin Zycher, Senior Fellow at the American Enterprise Institute’s (AEI) Center for Science, Technology, and Energy, told Rigzone that the oil market has changed forever “because there now is a greater permanent threat to shipping lanes, pipelines, etc”.
“Prices are, and will continue to be, higher than otherwise would be the case,” he added.
In his response to Rigzone’s questions, Art Hogan, Chief Market Strategist at B. Riley Wealth, said the U.S.-Iran conflict will cause long term changes to the global oil market.
“The first is that faith in fossil fuel transportation has been flipped on its head,” Hogan told Rigzone.
“We have already seen many oil producing countries move to alternative shipping options. Pipelines are being built to bypass the Strait of Hormuz,” he added.
“Secondly the stubbornly high oil prices have restarted a shift to alternatives including nuclear power and renewables. Nothing does more to drive change than drastic supply shock,” he continued.
“Lastly, I would say that the massive increase in distillate pricing: jet fuel, diesel fuel, and heating oil will likely be a catalyst for a long overdue step up in refining capacity,” he went on to state.
“‘Necessity is the mother of invention’, and I think we will see some long-term changes in the energy markets as an offshoot of the knock-on effect of the U.S.-Iran conflict,” he concluded.
Offering his response to Rigzone’s questions, Alan Gelder, SVP Refining, Chemicals, and Oil Markets at Wood Mackenzie, said, “the longer the U.S.-Iran conflict disrupts Middle East production and export of fossil fuels, the greater the incentive for fossil fuel importing countries to seek alternative sources to improve their energy security and resilience”.
“This involves faster electrification, based on domestic solar/wind and liquid renewables in SE Asia and Latin America,” he added.
Rebecca Babin, a Senior Equity Trader for CIBC Private Wealth in New York, told Rigzone, “this is a really interesting question”, adding, “I do think there have been developments during this conflict that may change, not necessarily the oil market itself, but how we model and think about the market’s response to major supply disruptions”.
“If we had modeled a near-closure of the Strait of Hormuz before this conflict, with the scale of supply losses we have experienced, almost every scenario would have produced significantly higher oil prices,” Babin said.
“What has been remarkable is the adaptability of the system. I think there are four important lessons,” Babin added.
“First, we may need to distinguish more clearly between physical supply loss and logistical disruption,” Babin noted.
“In both Russia-Ukraine and the U.S.-Iran conflict, much of the disruption has been logistical rather than the result of permanent damage to production infrastructure. What we have learned is that logistics are considerably more resilient and adaptable than many traditional supply-loss scenarios assume,” Babin stated.
This suggests that future disruption models need to differentiate more clearly between barrels that are physically unavailable and barrels that are temporarily logistically constrained, Babin told Rigzone, highlighting that the latter “can adapt far more quickly than we historically assumed”.
Outlining another lesson, Babin said policy response has evolved beyond simply adding or removing physical barrels.
“Throughout this conflict, rhetoric around negotiations, transit levels, alternative routes, and potential restoration of supply has had a meaningful impact on positioning and price expectations,” Babin noted.
“Markets have always traded headlines, but the speed and volume of information today mean narrative can influence price well before physical conditions change. It does not eliminate physical reality, but it can alter the timing and magnitude of the market’s response to it,” Babin added.
Noting a third lesson, Babon told Rigzone that China demonstrated how powerful demand-side adaptability can be.
“Rather than simply absorbing higher prices, China drew inventories, reduced crude imports, adjusted refinery runs, and shifted its demand profile,” Babin said.
“More broadly, an energy system with greater substitution capability can respond to an oil shock differently than historical models assume. That may prove to be one of the more important structural lessons from this conflict,” Babin pointed out.
The Senior Equity Trader for CIBC Private Wealth also told Rigzone that the U.S.-Iran conflict “exposed an important weakness in how we think about the relationship between inventories and price”.
“Although more than 500 million barrels of inventories have been drawn, those draws have been disproportionately dispersed outside the commercial inventories in the major OECD pricing centers,” Babin said.
“Much of the initial buffer came from strategic reserves, barrels on the water, and less transparent Chinese inventories. Those barrels absorbed a very real physical supply deficit, but their depletion did not generate the same price signal we historically associate with draws in readily available OECD commercial inventories,” Babin added.
That distinction matters, Babin highlighted.
“Many historical price relationships are built around the inventories we can see and that are most directly connected to pricing centers,” Babin noted.
“As a result, those models could signal a market that appeared considerably looser than the underlying global balance actually was. In other words, the supply disruption was real, but where the system absorbed it mattered enormously for how quickly that disruption translated into price,” Babin added.
Babin went on to tell Rigzone that the next phase may look different.
“As those more peripheral buffers are depleted, incremental draws should increasingly migrate toward the OECD commercial inventories that have a much more direct historical relationship with price,” Babin said.
“That could ultimately bring the physical balance and the traditional price signals back into closer alignment,” Babin noted.
Babin went on to conclude that she “would hesitate to say the oil market has ‘changed forever’” but added that she does think this conflict “has challenged some of the assumptions we use to model an oil shock”.
“The global oil system has proven far more adaptable than many models assumed – but adaptability should not be confused with abundance,” Babin said.
“Inventories, alternative trade routes, demand adjustments, and unconventional shipping can cushion a disruption, but they are finite shock absorbers,” Babin added.
“That may be the lasting lesson: in unprecedented disruptions, historical relationships do not always capture the full scope or speed of the market’s adaptability, which can change both the magnitude and timing of the price response,” Babin concluded.
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