The Commodities Feed: Middle East escalation pushes energy prices higher
The escalating tensions in the Middle East are driving energy prices higher, with crude oil prices recently surpassing $95 per barrel and diesel cracks reaching record highs, as noted by ING analysts Patterson and Manthey. Per the full note, these developments are creating a significant geopolitical risk premium in energy markets, largely due to supply threats in the Strait of Hormuz and diminishing expectations for recovery in LNG exports from the Persian Gulf. This turmoil is indicative of the tightness in both oil and refined products, which traders should keep a close watch on for potential volatility in related currency pairs.
What the desk is arguing
The primary thesis is that heightened geopolitical tensions in the Middle East are substantially influencing energy prices, leading to volatility in markets sensitive to these fluctuations. As reported by ING, crude oil has recently risen above $95/bbl, with the diesel crack at record highs due to ongoing conflicts around oil supply routes.
Support for this position stems from recent figures showing that 17 million barrels of oil flowed through the Strait of Hormuz, marking a significant point in daily oil flow amid unstable conditions. However, the market remains on edge, with tightness in the diesel market reflected by spreads trading in backwardation, signaling heightened investor concerns.
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Aligned with the desk view
Contrary positioning
Key takeaways
- 01Crude oil prices have surged above $95 per barrel amid increased geopolitical tensions.
- 02Diesel cracks reached record highs due to fears of supply disruption in the Middle East.
- 03The flow through the Strait of Hormuz remains robust but is subject to volatility.
- 04Nearby timespreads indicate tightness in refined product markets, particularly diesel.
Market implications
Traders should monitor the $95/bbl mark in crude as a critical resistance level, considering the current geopolitical backdrop. Additionally, any shifts in sentiment regarding supply disruptions may lead to increased volatility in energy-related currency pairs.
Risks to this view
A de-escalation of tensions in the Middle East or stabilization of supply routes could rapidly reverse the current bullish sentiment on energy prices, impacting related financial instruments significantly.
Articles The Commodities Feed: Middle East escalation pushes energy prices higher Published 03:45 Commodities daily Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Crude oil prices and diesel cracks strengthened as Middle East tensions escalated further, while European gas climbed to the highest since 2023 amid fading expectations for a recovery in Persian Gulf LNG exports Warren Patterson and Ewa Manthey Energy – ICE gasoil crack hits new record highs Brent pushed back above $95/bbl, reaching its highest level in more than a month, as Persian Gulf tensions escalated further. After weekend strikes, Iran hit two oil tankers in the region yesterday. The US, meanwhile, carried out additional overnight strikes on Iranian targets, adding fresh geopolitical risk premium to the market.
Developments in recent days brought risks to regional oil supplies back into focus. We’ve seen oil flow through the Strait of Hormuz despite the stalemate between the US and Iran, but rising tensions clearly put crossings at risk. The US energy secretary said 17m barrels of oil flowed through the strait on Monday, the highest volume since the conflict began.
When you factor in bypass volumes, it suggests Persian Gulf oil flows are above pre-war levels. But these numbers are uncertain. Ship trackers have been estimating much more modest flows.
It makes more sense to look at average flows over longer periods, rather than a single day, given flows move lots day to day. Escalation in the Middle East also dashes any hope for a recovery in refined product flows, leaving markets tight. This is mostly reflected in the diesel market, where the ICE gasoil crack traded to record highs yesterday of around $79/bbl, while the diesel crack in the US is trading well above $100/bbl.
Timespreads reflect this acute tightness, with the ICE gasoil Sep/Nov spread trading at a backwardation of $80/t. Given disruptions to Middle East and Russian diesel exports, and with little sign of an imminent recovery, middle distillate cracks are likely to remain highly elevated and volatile, particularly as we move towards seasonally stronger demand. The global refining system has little slack to make up for the disruptions we are currently seeing.
The latest API numbers show US crude oil inventories fell by 2.6m barrels over the last week. The picture was more mixed for refined products, with gasoline inventories up 300k barrels while distillate stocks fell by 300k barrels. The move in distillate stocks will do little to help ease tightness concerns.
The more widely followed EIA inventory report will be released today. TTF gas prices traded to their highest level since 2023, with front-month futures breaking above EUR75/MWh in early morning trading today. Escalation in the Persian Gulf pushes back hopes of any recovery in LNG exports from the region.
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