China Also Turns to Buying; Goldman Sachs Says, "Oil Prices Are Heading to $120"

[Financial News]  

International oil prices surged on July 7 local time, approaching $100 a barrel. As the United States is being drawn into a quagmire of war while being pulled along by Iran, which is holding the Strait of Hormuz hostage, concerns over supply disruptions are pushing oil prices higher again.

Brent crude for November delivery, the benchmark for international oil prices, climbed as high as $98.06 a barrel during the session. West Texas Intermediate crude (WTI), the U.S. benchmark, also rose to $93.29 a barrel for October delivery.
Brent crude rose above $98 during the session for the first time since late July. Concerns about further supply disruptions emerged after Iran’s Islamic Revolutionary Guard Corps (IRGC) fired missiles at two U.S. Navy warships, prompting the U.S. military to retaliate by attacking and disabling three Iranian tankers.
On July 7, Saudi Aramco oil facilities in Jizan, Saudi Arabia, were attacked.
Arn Román Rasmussen, a senior analyst at Global Risk Management, told the Financial Times (FT), "This is a serious escalation." He noted that the market is now watching closely to see whether ship-to-ship oil transfers outside the Gulf will be disrupted. Such transfers, he said, have served as a lifeline for the oil market in recent months. If they are also blocked, supply disruptions in the market will worsen.

International oil prices surged to $126 a barrel in late April before falling to just above $70 in early July. Expectations that a ceasefire agreement between the United States and Iran would lead to a permanent end to the war helped drive the decline.
However, prices turned upward again as both sides gradually raised tensions. The increase accelerated as concerns grew that the market’s safety net had weakened after countries released strategic petroleum reserves (SPR) on a large scale to contain the price surge following the outbreak of war on February 28.
Dan Struyven, co-head of global commodities strategy at Goldman Sachs, warned in an interview with Bloomberg TV on July 7 that Brent crude could rise to $120 a barrel "if attacks on shipping expand and intensify." He added that a series of events in recent days made this scenario increasingly likely.

Consulting firm Energy Aspects said commodity funds that had bet on falling oil prices after the war in Iran or remained on the sidelines have now "turned bullish." It said this was "mainly driven by the view that global inventories are approaching a critical threshold." The firm added that inventories outside China had fallen by more than 400 million barrels since the war began, while the volume of oil aboard seaborne tankers had also dropped to "the lowest level in years."
According to Jun Go, an analyst at Sparta Commodities, China has also recently reentered the market. When oil prices were rising early in the war, Chinese buyers cut their purchases by one-third and instead released oil from their reserves. This helped limit the price increase. Their return to buying, however, means upward pressure on oil prices is now greater than it was at the start of the war.
Go said Chinese buyers had turned to Iraqi and Saudi oil despite the high prices because they could no longer manage with Russian and Iranian oil alone.
An executive at a major oil trading company said oil prices would "continue on an upward trajectory," adding that "the only question is whether they rise gradually or rapidly." He explained that buyers had held back in anticipation of an end to the war, but now believed the market would find balance only when "one side has to break." In other words, demand must fall as crude or refined-product prices surge high enough to restore balance with supply.

Some refined-product prices have already reached record highs. U.S. wholesale diesel prices have traded more than $100 a barrel above crude prices since last month, while European wholesale prices have done so since last week.
Martin Rats of Morgan Stanley said, "In terms of refined products, we have already reached the critical point." He added, "That is exactly what the record-high diesel price shows. Diesel is trading at twice the price of crude. That has never happened before."
The main reason refined-product prices are soaring is that the Strait of Hormuz has been blocked. Refined products produced in the area have become difficult to transport, while some refining facilities have suffered operational disruptions because of repeated attacks.
Making matters worse, Ukraine has attacked Russian refining facilities, further tightening supplies to international markets. Ukraine said it attacked refining facilities in Russia’s Perm region and Tatarstan on the night of July 6. A series of drone attacks has eliminated more than 30% of Russia’s refining capacity.

Oil brokers who initially expected a short war are now preparing for a prolonged conflict. They are beginning to realize that the war in Iran could last far longer than previously expected.
An executive at a brokerage firm said the base case is now that the Strait of Hormuz "will never return to normal," adding that the era when 20 million barrels a day flowed through the strait, as before the war, is over.
Spencer Dale, a professor at the London School of Economics (LSE) and a former chief economist at the Bank of England (BoE) and British Petroleum (BP), explained that oil prices had remained lower than expected because, contrary to concerns, crude continued to flow steadily through the Strait of Hormuz and stockpiled oil was also consistently supplied to the market.
Dale noted, however, "You cannot draw down inventories indefinitely." He added, "If you had told 100 oil experts six months ago, 'This is what is going to happen,' not one of them would have said oil prices would still be below $100." His point was that current conditions are abnormal and that an era of $100-a-barrel oil is inevitable.
[email protected] Song Kyung-jae Reporter