In case of a Strait of Hormuz restriction, fuel may cost 6 PLN per litre

Jul 5, 2018 11:31 AM|Marcin Lipka

"We are threatened by a sharp increase in tension in the energy raw materials market. The United States wants to limit Iranian oil exports to zero. In response, Tehran sends signals that the Strait of Hormuz may be blocked. If this were to happen, oil prices would immediately jump by several dozen percent," writes Marcin Lipka, Conotoxia Senior Analyst.

American Independence Day has been used by President Donald Trump to try once again to influence oil prices. He suggested on Twitter that OPEC US allies were doing little to lower prices and that the US was keeping them safe. "REDUCE PRICING NOW," wrote Trump at the end of his tweet.

This information should theoretically result in lower prices, but the market is aware that oil prices depend not only on relatively small changes in supply from Saudi Arabia or the United Arab Emirates. In addition, the US is campaigning to reduce the production from Iran or even eliminate Iranian oil completely from the market. Brian Hook, Policy Planning Director at the Department of State, quoted by The Wall Street Journal, confirmed that America's goal is to reduce Iranian oil revenue to zero.

Major threat to oil supply

Although Iran seems to have little room for manoeuvre and must accept sanctions, it may seriously disrupt export of this raw material from other countries. The Strait of Hormuz is crucial in this context.

According to 2016 data from the US Energy Agency, 18.5 million barrels of oil per day (b/d) flows through the neck of the Persian and Oman Gulf. This is almost 20% of global oil production. It is worth remembering that supply problems of 1-2% often cause very serious changes in pricing.

At a press conference on Tuesday in Bern, Switzerland, the President of Iran was asked whether closure of the strait was under consideration. Hassan Rouhani stated quite diplomatically: "It is wrong to think that all producers will be able to export oil and that Iran will be the only country that will not be able to do it".

A much more confrontational comment was made by the deputy to the Sarollah Revolutionary Database in Tehran. According to a report by Bloomberg referring to the Iranian media, Esmaeil Kowsari said that if Iranian oil export is halted, "Iran will not allow oil to be exported through the Strait of Hormuz" by other countries.

Increases at the level of several dozen percent?

The sensitive point in the oil market associated with the Strait of Hormuz has been under discussion for years. The last time this issue was raised extensively was in 2011-2012 when Iran was sanctioned (a report on it, including its military implications, was presented by the Congressional Research Service "Iran's Threat to the Strait of Hormuz").

So what can be the market reaction to these events? Most of the oil from the Gulf flows to Asia (gas from Qatar to Europe), so it is these countries that could feel the shortage of the raw material at the earliest. There is also little possibility of bypassing the blockade (according to the EIA, oil pipelines may divert only 4 million b/d from 18.5 transported by sea).

The Congressional Research Service analysis points out that the impact on the market also depends on the current strength of demand, stocks and the possibility of increasing production in other oil-producing regions. At present, however, stocks have been falling for months (they are below the 5-year average), demand is growing steadily and production is not only threatened in the Gulf, but also in Venezuela and Libya. Given the tight oil market situation, increases would be substantial and likely to reach a few tens of percent without the rapid release of strategic oil and fuel stocks in the major economies of the world.

Historical prices at Polish petrol stations?

Without serious disturbances from the Strait of Hormuz, the prices of basic fuels in the coming weeks should be a dozen or several dozen or so pennies above the limit of 5 PLN per litre. If, however, exports by sea from the Gulf were to be blocked, then Poles could even see new historical records for diesel or unleaded petrol.

In case of an oil shock linked to military action, the increase in oil prices can be virtually arbitrary. However, a 30% increase in the price of crude oil would probably translate into an increase in the average fuel price to 6 PLN per litre, which would mean records of all time at Polish stations.

Jul 5, 2018 11:31 AM|Marcin Lipka

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