On July 19, Iran seized a British oil tanker in the Persian Gulf in an apparent retaliation for the UK seizure of an Iranian ship in Gibraltar earlier this month. A war of words followed, with British officials threatening “serious consequences,” although the standoff has quickly moved to the diplomatic arena.
In the not-so-distant past, tanker seizures in the Strait of Hormuz would have sent oil prices skyrocketing, easily pushing Brent into triple-digit pricing territory. However, with global oil supply still increasing at a faster rate than demand, oil traders are shrugging off the latest incident.
The latest seizure of an oil tanker led to a spike in tension between Iran and the UK, but both sides were clear that they wanted to resolve the matter diplomatically. Tehran’s move seems calculated to increase its leverage as it seeks to free the seized Iranian tanker in Gibraltar.
Tensions between Iran and the West are at their worst in years, and the pressure on Iran from sanctions has only increased with each passing month. Iran’s oil exports plunged by 450,000 barrels per day (b/d) in June, falling to just 530,000 b/d, according to the IEA. As recently as May 2018, the month that the U.S. announced it would withdraw from the nuclear deal and re-impose sanctions, Iran exported 2.6 million barrels per day (Mb/d).
The loss of over 2 Mb/d of Iranian exports, combined with the threat of more supply disruptions in a strategically important region, would normally send prices shooting up. However, Brent is trading below $65 per barrel, lower than it was in May 2018 on the eve of the return of sanctions and even lower than May 2019 when the U.S. let sanctions waivers expire.
“If you asked me the same question four or five years ago…what happens if we lose all of Iranian supplies and the Strait of Hormuz is at risk? I would have put a very high price on that,” Francisco Blanch, global head of commodities research at Bank of America Merrill Lynch, said on Bloomberg TV on Monday. “Shale oil production is performance has been so astonishing for years, that the market has become a lot more, perhaps, accommodative, and a lot more relaxed about tensions in the Middle East.” Blanch said that a much more serious outage in the Persian Gulf would be required to move oil prices out of their current slumber.
The collective shrug from oil traders can partially be chalked up to the diminished threat of outright war. “The response of oil prices to the seizure of a British oil tanker by armed Iranian forces near the Strait of Hormuz has been amazingly muted so far,” analysts with Commerzbank wrote in a July 23 note. “It appears that the majority of market participants are convinced that there will be no open conflict between the West and Iran.”
Ultimately, after the U.S. pulled back from a military strike in June, all parties seem set on keeping the conflict confined to the economic and diplomatic realm for now, notwithstanding the tanker seizures. “We think the oil market is currently pricing in a more optimistic view of the prospects for peace in the Middle East than it was last week, despite Iran’s seizure of a UK-flagged tanker and an apparent stiffening of both US and Iran positions across a wide range of issues,” Standard Chartered wrote in a note. “We think that the situation is unlikely to stir the oil market, at least while it is in its current mindset, until and unless there is a more visible manifestation of an increased risk to the flow of oil from southern Iraq in particular.”
The IEA issued a statement on Monday saying that it was “closely monitoring developments in the Strait of Hormuz,” and “stands ready to act if needed.” It noted that 20 Mb/d of oil transits the Strait each day, or about 20 percent of global supply. In addition, around a quarter of global LNG volumes pass through the narrow waterway. At the same time, the IEA said that consumers can be “reassured that the oil market is currently well supplied,” with supply having exceeded demand in the first six months of 2019 by 900,000 b/d. “These IEA emergency stocks are large enough to cover any disruptions in oil supply from the Strait of Hormuz for an extended period.”
Commerzbank ran the numbers. “The latest data show that the IEA member states have 1.55 billion barrels of crude oil and oil products in reserve, plus 650 million barrels held by industry,” Commerzbank analysts wrote. “Theoretically, this would be sufficient to cover a total blockade of the Strait of Hormuz for approx. 110 days.”
The subdued price response to heightened tension and risk in the Persian Gulf is not just due to ample supply. Cracks in demand are also increasingly visible. The International Monetary Fund just downgraded its forecast for global GDP growth to 3.2 percent for 2019, down from the 3.3 percent estimate from just a few months ago.
Slower growth will impact crude oil demand. In its latest Oil Market Report, the IEA estimated that demand would grow by 1.2 Mb/d in 2019, which was lower than the 1.5-Mb/d estimate the agency originally published last year. But even the lower figure might prove overly optimistic. “China is experiencing its slowest economic growth in the last three decades, so are some of the advanced economies … if the global economy performs even poorer than we assume, then we may even look at our numbers once again in the next months to come,” IEA executive director Fatih Birol told Reuters in an interview.