Analysis Reflections of a Regional War in the Middle East on the World Oil Market

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Scenario Analysis: Israel Gaza War​

The tension in the Middle East has driven up crude prices on risk premiums, kickstarting heightened oil trading which in turn supported tanker ton-mile demand. We are still in the middle of the conflict and there are multiple scenarios that could play out in the near future. An oil embargo against Israel, a disruption in the Strait of Hormuz by Iran, or a Suez Canal closure would have significant consequences in tanker demand and freight levels.

Scenario 1: oil embargo administered on Israel

According to Platts, Israel currently imports around 300,000 b/d of crude, with 60% of the volume from Kazakhstan and Azerbaijan (Iraq volume ceased amid the closure of Kirkuk-Ceyhan oil pipeline). In an “Oil Embargo” scenario, we assume the US could fill the gap of 180,000 b/d of crude demand from Israel. Using our base case vessel assumptions, this switch of crude sources would increase the Aframax tanker demand from 4 vessel equivalent to 17, which is expected to significantly boost the Aframax freight and earnings in the US Gulf market.

Due to the escalating Gaza conflict, Israel is reported to potentially divert its oil imports from the main Mediterranean port, Askhelon, to Eilat port on the Red Sea (Israeli Paz Oil Refinery). Taking this potential rerouting into consideration, tanker demand could rise further to 31 equivalent Aframaxes, nearly eight times higher than required by current oil flows.



Scenario 2: potential disruptions in the Strait of Hormuz

Based on our AIS tracking data, we have captured on average 15.1 million b/d of crude sailed from the Arabian Gulf in 2023 through the Hormuz Strait. In a “Strait Disruption” scenario, we foresee Saudi and UAE would maximize the use (+3.8 mil b/d) of the East-West Pipeline and Abu Dhabi Crude Oil Pipeline, bypassing the Strait. Meanwhile, the sharp increase in the global crude deficit and elevated prices would lead to a heavy inventory drawdown by 1.53 million b/d.

As 66% of crude liftings transited through the Strait has been carried by VLCCs, we anticipate a sharp decline in VLCC demand but significant support in demand for mid-sized tankers. The widened freight structure due to the imbalances in demand could find charterers heavily utilizing cheaper VLCCs when possible (especially in the Atlantic Basin), gradually mitigating the demand gap among the three DPP sectors. As a result, we have converted Suezmax and Aframax demand into VLCC demand equivalent to measure the overall demand side impact for the entire DPP tanker fleet. We found that despite potential for 10% lower volume flowing, DPP tanker demand could be expected to grow by 29 VLCC vessel demand equivalents.



Scenario 3: Suez Canal closure

Major DPP tanker routes will be disrupted by the closure of the Suez Canal including Middle East>Westbound and Europe>Eastbound trades (Russian barrels to Asian destinations since 2022). In this scenario, we assume oil flows remain at current levels while sailing distances notably increase through the Cape of Good Hope. Meanwhile, the SUMED pipeline connecting the Ain Sokhna terminal in the Red Sea and Sidi Kerir in the Med is assumed to be undisrupted; tracked by our AIS data, we have seen VLCCs (Bahri as an example) discharge their cargoes at the Ain Sokhna, while these cargoes are picked up by another vessel at the Sidi Kerir port.

In order to measure the impact from a longer sailing distance, we converted tanker demand into vessel equivalent for each DPP segments. The mid-sized tankers, Suezmax and Aframax, will find the greatly support by additional 72 and 66 demand equivalent respectively, compared to only 4 additional VLCC demand. Similarly for the CPP segments, a Suez Canal closure would result in net vessel demand equivalent additions of +45 LR2s, +17 LR1s, and +30 MR2s.

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World Bank sees lower 2024 oil price, but Middle East war could cause spike​

The World Bank said on Monday it expected global oil prices to average $90 a barrel in the fourth quarter and fall to an average of $81 in 2023 as slowing growth eases demand, but warned that an escalation of the latest Middle East conflict could spike prices significantly higher.

The World Bank's latest Commodity Markets Outlook report noted that oil prices have risen only about 6% since the start of the Israel-Hamas war, while prices of agricultural commodities, most metals and other commodities "have barely budged."

The report outlines three risk scenarios based on historical episodes involving regional conflicts since the 1970s, with increasing severity and consequences.

A "small disruption" scenario equivalent to the reduction in oil output seen during the Libyan civil war in 2011 of about 500,000 to 2 million barrels per day (bpd) would drive oil prices up to a range of $93 to $102 a barrel in the fourth quarter, the bank said.

A "medium disruption" scenario - roughly equivalent to the Iraq war in 2003 - would cut global oil supplies by 3 million to 5 million bpd, pushing prices to between $109 and $121 per barrel.

The World Bank's "large disruption" scenario approximates the impact of the 1973 Arab oil embargo, shrinking the global oil supply by 6 million to 8 million bpd. This would initially drive up prices to $140 to $157 a barrel, a jump of up to 75%.

"Higher oil prices, if sustained, inevitably mean higher food prices," said Ayhan Kose, the World Bank’s Deputy Chief Economist. "If a severe oil-price shock materializes, it would push up food price inflation that has already been elevated in many developing countries."

The World Bank report said that China's oil demand was surprisingly resilient given strains in the country's real estate sector, rising 12% in the first nine months of 2023 over the same period of 2022.


Oil production and exports from Russia have been relatively stable this year despite Western-imposed embargoes on Russian crude to punish Moscow over its invasion of Ukraine, the World Bank said.

RUSSIAN PRICE CAP 'UNENFORCEABLE'​

Russia's exports to the European Union, the U.S., Britain and other Western countries fell by 53 percentage points between 2021 and 2023, but these have been largely replaced with increased exports to China, India and Turkey - up 40 percentage points over the same period.

"The price cap on Russian crude oil introduced in late 2022 appears increasingly unenforceable given the recent spike in Urals prices," the World Bank said, referring to the benchmark Russian crude, currently quoted in the mid-$70s per barrel range, well above the G7-led $60 price cap for Russian crude. The cap aims to deny buyers of Russian crude the use of Western-supplied services, including shipping and insurance, unless cargoes are sold at or below the capped price.

"It seems that by putting together a "shadow fleet" (of tankers), Russia has been able to trade outside of the cap; the official Urals benchmark recently breached the cap for more than three months, averaging $80 per barrel in August," the report said.

If the Israel-Hamas conflict escalates, policymakers in developing countries will need to take steps to manage a potential increase in headline inflation, the World Bank said. It added that governments should avoid trade restrictions such as export bans on food and fertilizer because they can often intensify price volatility and heighten food insecurity.

World Bank sees lower 2024 oil price, but Middle East war could cause spike

The World Bank said on Monday it expected global oil prices to average $90 a barrel in the fourth quarter and fall to an average of $81 in 2024 as slowing growth eases demand, but warned that an escalation of the latest Middle East conflict could spike prices significantly higher.

www.reuters.com

 

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