Hello Power Up readers,
Brent crude oil prices opened the week sharply lower, dropping below $90 a barrel after the U.S. and Iran paused strikes over the weekend following two weeks of attacks. Coming only four days after climbing above $100, the price drop follows early signs of renewed diplomatic efforts by mediators to resolve the question that has come to define the conflict – control over the Strait of Hormuz.
Washington and Tehran appear to be still miles apart, however, with the former insisting the waterway should be open and free, while the latter seeks to maintain control over transits with a tolling system. Trust between the two sides appears to be slipping lower with every round of fighting, so bridging the gap between the U.S. and Iranian positions is going to be a Herculean task.
For now, ship transits through the strait remain extremely low, with only two tankers exiting the Gulf on Sunday, according to LSEG satellite-based data.
Making things even more complicated, tensions in the Red Sea remain elevated after Yemen’s Iran-backed Houthis attacked Saudi oil installations along the Red Sea coast on Saturday, including the Aramco refinery in Jizan. In retaliation, Saudi-backed Yemeni forces struck Houthi targets.
Ship traffic through Bab el-Mandeb, the strait at the southern tip of the Red Sea, has fallen sharply since the Houthis declared a blockade on Saudi exports last week, threatening Riyadh’s main oil export route that bypasses Hormuz.
Today’s crude prices suggest markets are highly sceptical about the prospects for diplomatic efforts and a sustained recovery of oil flows - and for good reason. Already, Saudi Arabia, Jordan and Iraq on Monday reported drone attacks which appeared to originate from Iraq, where Iran-backed militias regularly operate.
The market's moderated reaction stands in stark contrast to the overly optimistic sell-off that followed the June 17 U.S.-Iran deal, when prices dropped to around $70.
Indeed, traders appear to be pricing in not peace but the costs of adapting to a world where Middle East supplies are permanently disrupted, as ROI Asia Commodities Columnist Clyde Russell wrote today.
The impact of the Iran war and the escalating Ukrainian strikes on Russia’s oil refineries is having far-reaching effects on global energy markets. For Europe, the double whammy of limited liquefied natural gas and diesel supplies is becoming a grave problem ahead of winter. More on this below.
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