Airstrikes on Iran put oil war premiums in the spotlight

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Jeff Mower:

Hello, and welcome to the Oil Markets podcast by S&P Global Commodity Insights, where, today, we will be discussing war premiums, specifically the impact of the Israel-US-Iran conflict on oil and shipping prices.

I am Jeff Mower, director of Americas Oil News, and I'm joined today by Oil Futures editor, Chris Van Moessner, Policy editor Kate Winston, and head of Americas Freight Markets, Kristen Hays.

Oil prices rallied following an Israeli attack on Iranian nuclear and military targets earlier this month, but have just as quickly reversed soon after the US bombed three of Iran's nuclear enrichment facilities, and they sold off even more after US President Donald Trump claimed Israel and Iran agreed to a ceasefire. The attacks followed two months of negotiations between the US and Iran over Iran's nuclear program, during which Trump repeated that Iran could never develop a nuclear weapon. That campaign actually goes back even further. The US has been pressuring Iran largely through economic sanctions to abandon its nuclear ambitions for 20 years.

The initial oil price rally may have surprised some in the market, but the speed of the sell-off is kind of shocking. As we're recording this podcast on June 24th, NYMEX crude is at around $65, which was last seen right before Israel's June 13th initial attack. So Chris, I want to turn to you first. What do you think about the crude price falloff? Well, maybe you can go explain why the rally was significant, but also I'm just kind of curious, what do you think about the falloff as far as what the market is saying? Does that reflect a market confidence in this ceasefire?

Chris van Moessner:

Yeah, thanks Jeff. Yeah, so as you said, crude is down around $10 across the past two sessions. We're on pace to close just below where we were right where Israel launched strikes on Iran. And what this says to me in the market, this is a classic sort of buy the rumor, sell the news situation. What had really driven the rally was this multifaceted concerns about what conflict in the Middle East can look like and what it can metastasize into in terms of what's heavy impact of energy flows. As the strikes intensified, markets climbed higher thinking about what could happen here. We can see these black swan events, the closure of Hormuz, direct attacks on Iranian energy infrastructure, or Iranian attacks on other Gulf energy structure. We saw Houthi attacks on Saudi refinery infrastructure in 2019 that really hit Saudi production and spiked prices. So as the war wore on, these fears compounded and we got this big energy price rally. After the US strikes over the weekend, we see President Trump signaling de-escalation, really saying, as in plain words, that these strikes were limited on just the nuclear sites. There was no intention for further involvement. And that allowed risk premiums to really flee the market.

Jeff Mower:

Yeah, I thought it was interesting that I think Trump tweeted out once ... I should back up. During the initial strikes, Netanyahu seemed to be really pushing for regime change in Iran. I mean, it was really like, in a speech, was telling the Iranian people like, "Hey, this is your chance." Right? And then Trump came out with maybe one tweet where he said, "Hey, I know regime change doesn't sound great, it's not politically correct or whatever, but make Iran great again." And so I'm wondering how different would things be if he really pushed for ... or if he talked that up even more. I imagine we would see higher prices.

Chris van Moessner:

Oh yeah, absolutely. I mean, the notion of pursuing regime change really casts things in a very different light. Instead of limited strikes on specific industries or infrastructure, it really kind of puts all targets on the table. It shifts the Iranian leadership's thinking most likely from one of preservation to really self-preservation and really puts all options on the table. So in a situation like that, this concern about closing Hormuz would really come to center stage.

We saw that. I mean, during the Iran-Iraq War, you could say in some terms, kind of before the term was coined, but that was sort of regime change war, and that was the last time we saw Hormuz really closed, right?

Jeff Mower:

Oh, that's right. And just to let our listeners know, I know it's been out in the news a lot, but we're talking about the Strait of Hormuz, where something like, what is it? 20% of oil flows, global oil flows, and so they had closed that, this is in, when? The late '80s, Iran had mined it, I think. Is that correct?

Chris van Moessner:

Yeah, mined it, air strikes. It was really throughout, really multifaceted, how they attempted to close it. And that's part of the reason why the market's been discounting the closure as sort of this black swan event, is it's kind of hard to do even with the full force of their military might in the '80s, it really wasn't very effective. It cut flows, but it was uneven, and it's not something as simple as just declaring it closed.

Jeff Mower:

Yeah, and it's not particularly in Iran's best interest either, right? I mean, they're exporting 1.5, 1.7 million barrels a day of crude. And I think China is one of their main buyers or single largest buyer, right? I think even China came out and was like, "Hey, don't mess with our supply here."

Chris van Moessner:

Yeah, absolutely. And it's something if you're trying to avoid involvement of more state actors in this conflict, it's an option that would very much bring more forces to bear against you.

Jeff Mower:

One thing I thought was interesting too is Trump came out yesterday on 23rd, and this was after oil prices are already falling quite a bit, they were already down four bucks or something like that, and he put out a couple tweets, lots of all caps, of course, his style. And one of them was, "We want to see low oil prices, right? It's like we're kind of watching you," kind of thing. This is what he said, "Everyone keep oil prices down. I'm watching." Right?

The other one was directed to the Department of Energy, "Drill, baby. Drill. And I mean now." And this is repeating desires. I mean, Trump, obviously every president wants low gasoline prices. They don't want to see high gasoline prices. It never helps. It's not a winner as far as voters are concerned. But also I just thought that was interesting because he was repeating this sort of, I want low prices and a high production, or high production at low prices, which is a difficult thing to achieve.

But it did get me thinking, I mean, US production, still pretty strong. There's some expectations that it might slow down this year, but it's only slowing down because there's so much other production out in the market. And it does make me think, how much higher would prices have been if US crude production weren't at 13.5 million barrels a day? And how has that production growth been used as a tool in the geopolitical sphere here?

Chris van Moessner:

Yeah, I mean, when you look at the sort of history of the US production, it really ramps, it begins ramping up in the 2010s and then really takes off in the past seven, eight years. And it's huge for conflicts such as this because it just means there's so much more oil being produced. I mean, it's not just the US too, but also in South America, this ramp-up of non-OPEC production, and it means a lot more oil is being produced outside of the Persian Gulf and the Strait of Hormuz specifically, right? And so as a percentage, the US imports have crude from the Persian Gulf have subtly declined in the past decade as production has ramped. Since 2020, these imports have run about 10% of our total imports, the US total imports, and that's down from like 20 to 25% in the 2000s and 2010s. So when you're looking at the contours of this conflict and this concern about the closure of Hormuz and how disruptive that would be, it's less impactful to the US now considering its high levels of domestic production than it would've been 10, 15, 20 years ago.

Jeff Mower:

Mm-hmm. And including all that crude coming down from Canada as well, right? That's a lot. Canadian crude has pretty much pushed out, especially from Midwest refiners, all waterborne imports, especially the kind of heavier crudes.

So, Kristen, when we talk about exports, right, US crude exports, I mean, I was kind of digging around and saw rates, I was just digging around some of the rates as far as tanker rates go, and there's been a pretty big spike in rates for some crude vessels. How broad was that spike in response to this?

Kristin Hays:

Freight rates from the Persian Gulf have surged quite a bit as security risks have escalated and vessel availability tightens. And what we're talking about of all the different kinds of tankers are the VLCCs, the very large crude carriers. These are the ones that can carry 270,000 metric tons of crude. That's about 2 million barrels. Rates from the Persian Gulf to China for VLCCs were assessed at $19.36 per metric ton on June 23rd. That's up 82% since the conflict began between Israel and Iran on June 13th. It rose more than 5% today, June 24th. And that's not just out of the Persian Gulf. You look at the US Gulf Coast to China, VLCC rates have also strengthened. Platts assessed that rate at $31.48 per metric ton on June 23rd. That's up nearly 43% since June 13th. And that translates to eight and a half million dollars on June 23rd versus $5.95 million on June 13th when the conflict started.

Jeff Mower:

Now, I'm curious how much of that rate increase, is that due to the risk factor or were traders actually looking to secure barrels to sort of replace ... did we see a surge in tanker fixings?

Kristin Hays:

Well, as far as fixtures are concerned, yes. For the US Gulf Coast to China in June, there have been 14 VLCCs fixed. That's up 75% from May, for example. And when you compare that to Brazil to China in June, that was eight fixtures. That's down 55% from May. So you saw some changes there. But really what this is more about is shipowners wanting to take advantage of those higher returns, seeing rates go up, and it's going up because of the risk and because of sentiment, but it's not so much trying to replace crude as to take advantage of the rates at the level where they are.

Jeff Mower:

You mentioned the increase in US Gulf Coast to China. Could that in part be due to any kind of deal that the US has made with China over tariffs? I know we haven't seen crude go to China, US crude go to China in quite a while, maybe since February or March.

Kristin Hays:

Yeah, not in huge amounts. Part of that could be, okay, we've got these rates, let's book it. We've got the crude, that's available, let's get it on the water from the Gulf Coast to China. How long that will last we'll have to see as this goes on, because there is a lot of sentiment out there that, okay, so there's a ceasefire, but how long is that really going to last? We all did hear about the facility in Qatar that Iran bombed, so that was seen as Iran sending a message that they're willing to negotiate, they're not willing to just go completely all out. And then there have been some other incidents since the ceasefire, since Trump announced that there was a ceasefire. So we'll see how that actually works out over time.

Jeff Mower:

Yeah, I thought that was interesting, another Trump comment, I think that was this morning, where he said, "China can now buy Iranian crude." Now, China was already buying Iranian crude, but he seemed to be implying they can buy Iranian crude legally now. Right?

Kristin Hays:

Well, yeah, that's something new.

Jeff Mower:

Yeah, yeah, exactly. But it made me wonder, does that mean something for tanker rates going forward? Does that mean, would China buy even more Iranian crude? Or does it kind of free up some vessels? Or am I reading that wrong?

Kristin Hays:

Well, it could be, because with economies of scale, you like a VLCC when you can get a lot of crude and you can spread the cost over that amount of it. So you do better than going for an Aframax or a Suezmax. A Suezmax is the next step smaller and an Aframax is two steps smaller than a VLCC.

The potential impact that we've heard from ship brokers and other sources is there could be more demand from the Atlantic basin, both crude and tanker-wise, which could quickly increase demand and limit supply. What we're seeing with the rates for VLCCs, as I just mentioned, are rising fast, but that's leaving them less of an option for transatlantic runs, and that could create more transatlantic demand on mid-sized tankers. That would be Suezmax, which can carry up to 130,000 to 150,000 metric tons of crude, and Aframaxes, which can carry 70 to 90,000 metric tons of crude.

Jeff Mower:

And so you're talking about US crude going to the transatlantic? Yeah.

Kristin Hays:

Yeah.

Jeff Mower:

Northwest Europe. I know there's been a lot of demand over there for US crude because it really plays into the Brent benchmark there.

Kristin Hays:

Yeah, and we've seen kind of an increase in the Aframax, our benchmark assessment, that is US Gulf Coast to UK continent, which means UK and Europe. That was assessed at $34.45 per metric ton on June 23rd. That's up 16% since June 13th and just over 14% from last Friday, June 20th. So we're seeing an impact there too. It's just not as stark as what we've seen with the VLCCs.

Jeff Mower:

Yeah. The last I looked, I was looking at commodities at sea. We have that ship vessel tracking software, Commodities at Sea. It showed like as of mid-June, it was quite a big surge of US crude into Northwest Europe. I thought that was interesting.

Kristin Hays:

Yeah, I believe that initial data was showing that globally 699 unladen crude and product tankers were destined for the eight countries with oil export facilities, including Saudi, as of June 22nd. That's down from a daily average of 730 on June 15th through 21 and 741 from June 18 through the 14th.

Jeff Mower:

So I'm curious, looking forward, Kate, what does this mean? I know you've written about this a bit. What does it mean for the kind of US nuclear deal with Iran? I mean, does it even matter now? I imagine this will still be necessary to get something done. And what does that mean for sanctions? Sanctions on Iranian crude?

Kate Winston:

Yeah, I think it's still unclear how much damage was done to Iran's nuclear facilities. And many people I've heard speak about this say they think a deal is still needed because Iran could always keep trying to pursue a weapon even secretly. Fordo, the site that the US bombed, well, one of the sites the US bombed, that was a secret until 2009. So Iran has a history of doing its nuclear program covertly. And also there's the idea that if Iran feels more threatened, as it would feel now, it would work potentially harder for a weapon, so it may have been set back a few years, but it's expected to continue to pursue something.

Jeff Mower:

And has there been talk yet about ... I know talks were canceled soon after the Israeli attacks, the initial Israeli attacks on Iran. Has there been any suggestions that talks would resume between the US and Iran yet?

Kate Winston:

Yeah, I haven't heard anything concrete. I think that Trump would really like for talks to resume. The prospects for a deal are still quite unclear. Some say that the chances for a deal are even slimmer now. The Iranian leadership is not cohesive and not in great communication while it was under attack. And so therefore it would be hard to negotiate. But also that there's even less trust now in Iran. For the US, there's this narrative that the talks were just a ruse to come up with a reason to strike, or that the International Atomic Energy Agency put out a rebuke of Iran the day before Israel started striking, so that sort of maybe played into that narrative. And so now there's very little trust in the US and the inspectors that would be involved in making sure Iran complies with any kind of deal. The main hurdle is still that the US wants no enrichment, and Iran says they won't give up their enrichment capabilities. But that was true even before the strikes. And some people are saying there wasn't a chance before, so maybe now it'll be different.

Jeff Mower:

And like I said in the intro, it goes back so long. I mean, there's been these economic sanctions, right? I was just reading this book by a guy named Edward Fishman called Choke Points. I recommend it. I haven't finished yet, but I just happened to be reading about the sort of initial, like in the mid-2000s, when the US realized it had more economic leverage over Iran. And at the time, President George W. Bush didn't want a repeat of the Iraq war. He just found out that Iran's got nuclear weapons, or not nuclear weapons, but may be able to develop nuclear weapons, wanted to do something about it. But because of all the skepticism around the reasons for going to the Iraq war, he kind of turned to more economic weapons that were developed over the years. But even that, I guess, well, I know Trump pulled out of the JCPOA, but even that, I guess has a limit. Or it seems to, right? It seems like there's so much that's been going on in recent months, what were the state of sanctions prior to this attack? Do you remember? What additional sanctions ... did the US kind of run out of entities to sanction?

Kate Winston:

No. I think that the Trump administration continued to put sanctions on even during negotiations, including on some Chinese refiners that were bringing in Iranian oil.

Jeff Mower:

That's right.

Kate Winston:

On LPG network out of Iran. So the sanctions continued, but I don't think they were anywhere near the maximum pressure that could be brought to the situation. The US definitely could go after more Chinese buyers of Iranian oil that could also try to intervene more on ship-to-ship transfers go after ports a little bit more. And so there were still some tools on the table that Trump could have used and could in the future.

Jeff Mower:

What would it look like if ... I know you've written about this before, really right before the attacks, so not too long before the attacks, how much additional crude could Iran put on the market if sanctions were lifted at some point?

Kate Winston:

Yeah, so current exports around 1.5 million barrels a day, and our analysts here at S&P Global believe that that could increase by 300,000 to 500,000 barrels a day in a span of three to four months' time. There's also, on top of that, Iran would be able to clear about 40 million barrels of floating storage. So that would add about 450,000 barrels a day for a few months. And so over a month or two, it would crest at about 900,000 additional barrels a day. And so those numbers were all sort of where we were before the most recent conflict.

Jeff Mower:

Mm-hmm, mm-hmm. I feel like we are in a situation where we were before the conflict, right? And now these sorts of supply concerns that were in the market, well, maybe they'll begin to emerge again, right? I mean, I don't know, Chris, what do you think? I don't know if you're hearing much on that yet, but that was all the talk before the conflict, was like, "Hey, we've got tons of crude." S&P Global Commodity Insights analysts were reducing their estimate for US crude production because of all the barrels in the market from Ghana and Brazil and elsewhere. And it looked as though for a while Trump was going to get his desire from early in the year of $50 barrel crude, which producers of course did not like, if you read the Dallas Fed Survey published about a month ago.

So I don't know, Chris, what do you think? Do you think that's where the market's going to go now? Or is it just going to start focusing on this supply or supply-demand imbalance going forward, barring any disruptions?

Chris van Moessner:

Yeah, I mean, there's a goldilocks number for how expensive crude wants to be in the US. Yeah, so the concerns with the supply disruptions are always extremely short term with the Iran war here or the conflict. There's lots of crude out there. There's lots of crude and reserve, OPEC+ is unwinding their 2.2 million barrel per day voluntary cuts. They've trimmed those back a little bit over the past couple of months, but they're still withholding 3.6 million barrels per day baseline cuts through the end of next year, which would more than replace every Iranian barrel in the market right now.

So when we're thinking about disruptions, it would just be a disruption until this extra capacity kicks in, which there would be a timeline mismatch there. But heading into the back half of the year though, we're probably heading back into a narrative of rising supply, supply outstripping demand growth, supply growth outstripping demand growth, and really probably just some headwinds of prices going forward.

Jeff Mower:

Mm-hmm. Well, fair enough. So that's a good place to stop. Thanks, Chris, and thank you, Kate, and thank you, Kristen, for joining me in this conversation. And thank you to our listeners for tuning in. This Oil Markets episode was produced by Jennifer Pedrick in Houston.ning.