Happy Friday!
Energy markets experienced another historic week as the war in Iran continued to escalate with no clear path toward resolution. Crude oil prices surged throughout the week, with WTI pushing well above $100/barrel and Brent trading above $140/barrel on the physical spot market by Thursday — even though paper Brent held around $110/barrel. Brent is now on track for a record monthly gain, having surged roughly 59% since the conflict began. The International Energy Agency continues to describe the current situation as the worst global energy supply shock in history.
The most significant shift this week came on Tuesday, when Trump signaled he was willing to end the U.S. military campaign against Iran even if the Strait of Hormuz remains largely closed. Rather than taking on the job of clearing the waterway ourselves, the administration indicated it would continue to focus on destroying Iran’s navy and missile stockpiles, wind down the fighting, and then use diplomacy to push Tehran to reopen the Straight. Trump also called on other nations to launch their own operations to clear the Strait. The market briefly interpreted this as bearish — until Thursday, when Trump went in the opposite direction. In a speech that was difficult to digest, Trump signaled that more strikes on Iran were going to continue for two to three more weeks and offered no plan for reopening the Strait. Crude prices ripped more than 10% higher on Thursday alone following the speech.
The conflict continued to intensify throughout the week. Iran struck an oil tanker off the coast of Dubai on Tuesday, a reminder that Iran’s ability to threaten Gulf shipping has not been eliminated. On the diplomatic side, representatives from Egypt, Saudi Arabia, Pakistan, and Turkey met early in the week to discuss possible paths toward talks, with Pakistan preparing to host any future negotiations. However, the Ayatollah continues to reject any ceasefire proposals, and Iran is now said to have its targets set on American businesses as well as additional U.S. bases in the region.
Perhaps the most remarkable development of the week was Iran’s decision to convert the Strait of Hormuz from a blockade into a revenue stream. Iran’s Revolutionary Guard Corps is proposing a toll system, creating a ranking of countries from one to five with friendlier nations receiving better terms. For oil tankers, the starting price in negotiations is roughly one dollar per barrel, payable in Chinese yuan or stablecoins. Once a toll is paid, ships receive a permit code and route instructions, are expected to fly the flag of the country that negotiated passage, and are escorted through a route close to the Iranian coast by a patrol boat. Iran is not looking to simply blocking the Strait. They want to use it to build new political and financial relationships while the war continues.
The supply picture remains extremely difficult. About five percent of the world’s crude-carrying tankers remain trapped inside the Persian Gulf, and the global fleet is badly out of position to handle rerouting. Diesel-hauling tankers that had been heading toward Europe have turned away, rerouting around Africa and taking the longest routes possible. The UAE is preparing to help reopen the Strait by force as a Gulf-led coalition begins to take shape, but the timeline and risks remain unclear. The April 7 deadline Trump set for Iran to reopen the Strait is now days away, and with Iran actively building a toll system rather than opening the Straight, the market has very little confidence in any near-term outcome.
On the economic front, gasoline prices in the United States continues to remain above $4/gallon. History suggests those prices will not come back down quickly. In 2022, it took five months for pump prices to fall back to normal after spiking with the war in Ukraine. Diesel prices surged another 50 cents or more on Thursday alone following Trump’s speech. With the backlog of ships, the amount of refining capacity shuttered across the Gulf, and the time required to restore damaged infrastructure, I do not see a realistic scenario where prices drop dramatically for at least six to nine months. If the Strait is not reopened by the end of April, paper crude prices will likely jump to meet physical spot prices and push everything higher from there. Because crude oil affects the price of nearly everything we consume, I believe there is a possibility of a 6% inflation print this summer, putting potential stagflation or a mild recession on the table.
The Chicago spot market had an explosive week with diesel prices rising close to a dollar per gallon and gasoline up more than 30 cents. The move was driven by higher crude prices combined with accelerating seasonal demand as farming season approaches. I do not see any scenario in the near term where gasoline or diesel prices come down. Gasoline will exceed $4 per gallon at the pump, and diesel is headed above $5 per gallon. Diesel prices have now inflated approximately 85% since the first week of January.
Propane continues to decouple from the volatility gripping crude oil and diesel. U.S. propane inventories are on track to hit record highs, as is inventory in the Midwest. There is no realistic scenario where propane production decreases — propane is a byproduct of crude oil drilling, and there is no chance drilling slows at current prices. Even with record export activity, inventories will continue to build. I believe summer fill prices might come down a bit and next year’s contracts will be under $2/gallon, making propane by far the least inflationary energy product during the war. Where diesel has seen the 85% inflation since January, propane is looking at closer to 10%.
As always, if you have any questions, please feel free to give us a call. Have a great Easter weekend!
Best regards,
Jon Crawford
Sources: Bloomberg, Reuters, Wall Street Journal
