Jeremy Harding, Head of Wealth Manager at Norman K.
The price of a barrel of oil rose again on Wednesday and is once more approaching $100. On the same day, in an attempt to offset the surge in prices, the G7 countries announced the release of 300 to 400 million barrels from their strategic reserves. This is an unprecedented volume in the context of this mechanism, which has been activated five times in the past to limit the damage in the event of sudden market movements. By way of comparison, these same countries released 182 million barrels in 2022 after Russia’s invasion of Ukraine. In total, they have 1.2 billion units available to deal with any eventuality.
However, despite this historic decision, oil prices continue to rise, with analysts believing that the proposal is insufficient to allay fears. This reinforces market doubts about US statements regarding a rapid end to the conflict, which, at this stage, no one can see how it could constitute an operational success. There are also divergent strategic visions between Israel, which wants to continue and intensify operations to bring down the Iranian regime, and the US administration, which fears inflationary pressures in the United States and the spectre of electoral punishment in the November midterms.
Since 28 February and the first strikes launched by the United States and Israel, maritime traffic has virtually come to a standstill in the Strait of Hormuz. This vital maritime corridor links the Persian Gulf to the Gulf of Oman. Around 20% of the world’s oil and gas normally passes through it.
Iran believes it has every interest in continuing this blockade and is taking it to a new level by deploying sea mines. A formidable weapon for sowing chaos. The country would only need to deploy 5% of its available arsenal to block traffic for several months. For Iran, this simple and economical solution aims to upset the balance of the conflict. Given the danger to commercial shipping, insurers and shipowners have no choice but to withdraw immediately from the area.
In a worst-case scenario, if traffic were disrupted for three months, this could lead to the loss of 1,380 million barrels of crude oil, with the price of Brent remaining above the $100 mark until the third quarter. At the same time, the price of the TTF futures contract would also double compared to February.
Beyond mines, Iran is also carrying out attacks using explosive drones on commercial vessels off the coasts of Iraq and the United Arab Emirates. Since Wednesday, six commercial vessels have been hit by these strikes, and this number could still grow. Although initiated by Israel and the United States, Iran has every interest in prolonging this war and increasing the cost to its adversaries. With this in mind, Tehran is pursuing its strategy and warning that ‘the whole world must prepare for the price of a barrel of oil to reach $200’.
