Happy Friday!
Energy markets experienced historic volatility again this week as the war with Iran continues to dominate global oil trade. Prices briefly surged above $115 per barrel early in the week before swinging wildly in both directions as traders reacted to military developments, production shutdowns, and the continued closure of the Strait of Hormuz. Even after massive swings during the week, crude oil now looks set to close near $100 per barrel, marking another strong weekly gain.
Below is a breakdown of the major developments from March 9th through March 13th.
The war in Iran remains the central driver of global oil markets. Over the weekend, Iran named a new Supreme Leader following the death of Ayatollah Khamenei. The new leadership immediately signaled that Iran would not surrender, although they attempted to ease tensions with neighboring countries after earlier attacks. Those efforts quickly collapsed after Iran launched additional missile strikes, including one targeting Turkey again and additional attacks against Israel.
The United States and Israel responded with the heaviest strikes of the war so far on Tuesday, targeting Iranian military and drone facilities. The goal appears to be limiting Iran’s ability to continue attacking oil infrastructure and shipping routes. While drone strikes have slowed due to apparent ammunition shortages, missile attacks continue.
Iran’s broader strategy has become clearer as the week progressed. Rather than attempting to win militarily, Iran appears to be trying to leverage the global economic impact of the war by disrupting energy flows. By threatening or attacking ships in the Strait of Hormuz, Iran is attempting to create enough pressure from high oil prices that international actors force a ceasefire.
Despite heavy bombing of Iranian targets, the Strait remains effectively closed. Iran confirmed this week that the waterway will remain closed until the war ends. Drone attacks have continued against neighboring countries and ships in the Gulf, challenging earlier claims that Iran’s long-range strike capabilities had been destroyed. The United States continued to expand its military presence in the region this week. On Friday, the Pentagon deployed a Marine Expeditionary Unit carrying roughly 2,500 Marines to the Strait region. At the same time, the U.S. eliminated multiple Iranian vessels suspected of attempting to lay naval mines in the shipping lanes earlier in the week.
The possibility of further escalation remains high, especially as discussions emerge around deploying special forces to secure Iran’s nuclear material if the conflict drags on. The shutdown of shipping routes through the Strait of Hormuz continues to disrupt global energy supply chains at an unprecedented scale. Roughly 20 million barrels of oil normally pass through the Strait each day. With ships halted for nearly two weeks, over 300 million barrels of oil are now effectively delayed from reaching the market. The situation is creating a cascade of disruptions across the global economy. Liquefied natural gas shipments and fertilizer cargoes have also been caught in the backlog, raising concerns that prolonged closure could affect electricity generation and even global crop planting.
Production across the Middle East has also been severely cut. Gulf nations have cut approximately 10 million barrels per day of output as storage facilities fill up with nowhere to ship oil. Iraq reduced production by roughly 70 percent, while Kuwait continues to declare force majeure on export contracts. The United Arab Emirates is also preparing to shut down additional production if exports cannot resume soon. Even if the Strait were to reopen immediately, it would take time for production to ramp back up and for ships to clear the backlog.
Some limited movement has begun to emerge. A small cluster of ships approached the Strait earlier this week, suggesting that some operators may attempt to resume shipments cautiously. An Indian tanker successfully passed through the Strait on Friday, providing a brief moment of optimism, although the overall shipping situation remains extremely fragile. Meanwhile, several energy companies are continuing to pursue alternative supply. Chevron and Shell both announced they are moving closer to long-term supply deals with Venezuela. The deals would not do anything to move the needle in the near term, but offer some relief in the coming years.
Global political maneuvering has intensified as governments attempt to stabilize the oil market. The G7 met this week to coordinate the potential release of global strategic reserves. The International Energy Agency has already announced a massive 400-million-barrel reserve release, nearly triple the largest coordinated release in history. Despite these efforts, the market reaction has been muted because the supply disruptions involve transportation rather than simply a shortage of stored oil.
President Trump also announced a 150-million-barrel release from the U.S. Strategic Petroleum Reserve midweek. Even that large release failed to meaningfully reduce prices, highlighting how significant the shipping disruption has become. In an effort to stabilize global supply, the United States also issued a 30-day waiver allowing Russian oil exports to continue flowing to all countries. India remains one of the primary beneficiaries of the waiver, helping ensure that at least some global supply continues to reach the market while Middle Eastern shipments remain uncertain.
Another geopolitical development worth noting is China reopening a rail link to North Korea for the first time in six years. While not directly tied to oil markets, the move suggests China may be expanding strategic relationships while Western attention remains focused on the Middle East. Meanwhile, Trump held discussions with Vladimir Putin regarding both the Iran conflict and the possibility of ending the war in Ukraine. Trump indicated he may be willing to lift sanctions on Russian oil if Russia agrees to meaningful peace negotiations with Ukraine.
Economic indicators continue to send mixed signals, but energy prices are quickly becoming the dominant factor for inflation expectations. Consumer prices rose 2.4 percent year over year in February, but that number will almost certainly move higher in the coming months as the energy shock from the Iran war filters through transportation, manufacturing, and food supply chains. The U.S. dollar has remained surprisingly strong throughout the conflict, which has helped limit even larger spikes in crude oil prices. Normally such extreme geopolitical events would cause much sharper price increases.
Still, the risk of broader economic disruption remains significant. If the Strait remains closed for another week or more, certain countries could begin facing real energy shortages. The disruption to fertilizer shipments could also create ripple effects for global agriculture if planting seasons are affected. And the US economy will start to contract.
Chicago spot markets experienced extreme volatility this week as traders struggled to price both the surge in crude oil and rapidly shifting diesel fundamentals. Diesel differentials have collapsed while crude prices soared, creating an unusual market structure. The spot market is attempting to balance refinery maintenance season, limited local inventories, and rapidly changing global crude prices. Despite the falling differentials, the overall cost of gasoline and diesel continues to rise sharply due to the higher price of crude oil. Until ships begin moving through the Strait of Hormuz consistently without the threat of attack, I expect retail gasoline and diesel prices to continue rising.
Propane markets were finally pulled into the broader energy volatility this week, although the price reaction has been far more muted than crude or diesel. Inventories remain relatively strong as the winter heating season winds down. While prices experienced significant swings during the week, propane is currently holding relatively flat overall. Looking ahead, propane may begin to decouple from crude oil prices. As crude production increases globally, propane supply will naturally increase as well. Combined with seasonal demand declines after winter, propane prices may actually weaken heading into summer unless export demand increases significantly.
As always, if you have any questions please feel free to give us a call. Have a great weekend!
Best regards,
Jon Crawford
Sources: Bloomberg, Reuters, Wall Street Journal
