Iran's $200 oil threat isn't that far-fetched

LONDON — Iran’s threat to send oil prices to $200 a barrel may sound like bombast, but as the energy crisis drags on, that outcome looks more likely than US President Donald Trump’s prediction that prices will soon fall back to pre-war levels.

Now in its third week, the joint Israeli-US war against Iran—which has escalated into a regional conflict—has elicited a surprisingly muted reaction from global oil benchmarks. Brent crude now trades near $100 a barrel, about 65% above its level at the start of the year, a price that was unthinkable only weeks ago but still below the brief peak of nearly $120 last Monday.

Given that roughly a fifth of global oil supplies, or about 20 million barrels per day, have been trapped by the effective closure of the Strait of Hormuz since the conflict began, crude prices should arguably be a lot higher. Brent fell slightly on Monday on news that several tankers carrying crude and oil products to India, China, and Pakistan have crossed the strait in recent days, indicating that some countries may manage to negotiate safe passage. But the volumes being moved are extremely modest. Investors still appear ready to give Trump the benefit of the doubt, wagering that the president will ultimately be able to limit the market damage—a sentiment often called the “Trump put” or the “TACO trade.”

"When this is over oil prices are going to go down very, very rapidly," Trump told reporters on Monday. However, that optimism looks increasingly hard to square with realities on the ground—both on the battlefield and in physical oil markets, where supply snarls are metastasizing.

RED ALERT

Physical crude markets are flashing stress signals that paper markets have so far largely ignored. Omani crude—exported from a terminal outside the Strait of Hormuz—is trading at a record premium of $51 a barrel to Brent, pushing the outright price to around $150 a barrel for May loading.

A similar pattern is playing out elsewhere. Cash premiums for Dubai crude jumped to $56 a barrel on Monday. The surge reflects enormous uncertainty over available supply amid repeated Iranian strikes on oil terminals in Oman and at Fujairah, the United Arab Emirates’ main exporting hub outside Hormuz.

For refiners, particularly in Asia, this is a serious problem. The region relies on the Middle East for roughly 60% of its crude imports. A shipment from the Gulf takes around a month to reach Asian customers; with every day Hormuz remains closed, the supply gap widens. Refiners across Asia have begun cutting processing rates to conserve dwindling stocks. China’s Sinopec plans to slash production throughput this month by more than 10%. Simultaneously, China and Thailand have banned exports of refined fuels to protect domestic supplies.

As crude scarcity deepens, refined fuel prices are soaring. Asian jet fuel prices are approaching $200 a barrel. This crisis is not confined to Asia; Europe accounted for roughly three-quarters of Middle Eastern jet fuel exports shipped via Hormuz last year, yet no cargo has transited the strait since the war began.

THREE TIMES WORSE

The comparison with the Ukraine crisis is telling. Russia supplied around 30% of Europe’s crude imports before the 2022 invasion. The fear of losing supply from Russia—which pumps around 10 million bpd—drove Brent to $130 a barrel even though the worst-case scenario never fully materialized.

The physical disruption from the Iran war has already exceeded that amount by more than three times, according to Morgan Stanley. While the oil market entered the war with a forecasted glut of 3.7 million bpd, that surplus has been obliterated. The IEA’s announcement of a record release of 400 million barrels from strategic reserves has cushioned the initial blow, but drawing down inventories cannot substitute for new barrels.

Even an immediate reopening of Hormuz would not bring instant relief. Around 10 million bpd of Middle Eastern production has been shut in since the conflict began. Restoring those flows would take weeks, if not months. The supply shock is real and could have legs. Traders may want to think twice before betting that the return to normality Trump has promised is coming anytime soon.

The opinions expressed here are those of Ron Bousso, a columnist for Reuters