Brent Breaks $115: The War Premium Is Back

Brent crude experienced a significant increase, surpassing $115 per barrel on Friday. This marks its highest level since early May, approaching the peak of $115.25 reached during the Iran War on March 9.

The shift is not a fleeting surge. It represents a signal of strain within the supply chain, and the market is adjusting the valuation of geopolitical risk as events unfold.

The War Trade Returns

The immediate trigger is a convergence of intensification.

Reports suggest that officials from the US and Israel have formulated strategies for potential renewed actions against Iran following the US midterm elections, with a focus on Iran's energy infrastructure as a probable target.

President Trump has made it clear that Washington is not engaging in negotiations with Tehran. Iran’s army chief stated that the military is ready for unconventional combat strategies.

The market is not pausing for the initial strike. It assesses the likelihood that the Strait of Hormuz, a critical passage for approximately one-fifth of global oil and LNG, may experience renewed disruptions.

The Shipping Tax That Remains Under the Radar

The listed price fails to capture the true expense involved.

Gulf crude exports have shown some signs of recovery; however, the logistical framework remains compromised.

In September, over 1 million barrels per day of Gulf crude were transferred ship-to-ship, accounting for approximately 7.5% of regional exports. This practice was nearly absent prior to the conflict.

Freight rates for very large crude carriers from the Gulf to China have surged to nearly $35 per barrel, exceeding twenty times the average of the past decade.

Citi, which just three months ago forecasted $60 oil, has had to completely retract its pessimistic outlook.

The bank now cautions that the increase in volumes does not equate to an improvement in efficiency. Purchasers are incurring an additional cost associated with conflict, which is reflected in shipping rates, rather than solely in the standard benchmark.

Diesel: The Concealed Vulnerability

The crude figures alone do not provide a complete narrative.

The market for refined products has become even more constrained.

In September, the combined diesel net exports from the Middle East and Russia experienced a significant decline, dropping by 1.3 million barrels per day to a mere 820,000 bpd. This represents a staggering year-on-year decrease of over 60%.

Approximately 20 refineries in the area experienced damage or disruptions, resulting in a loss of more than 3 million barrels per day of refining capacity at its peak.

The recent partial easing of diesel export restrictions by Russia, along with the IEA's reserve releases, serve as minimal counterbalances at best.

The current diesel shortage is fundamentally rooted, directly influencing inflation expectations throughout Europe and Asia.

The schedule of political events

The timing is crucial.

The upcoming US midterms are just under two weeks away.

Trump has a motivation to steer clear of any noticeable escalation prior to November 3, yet the period following the election presents ample opportunities for action.

Saudi Arabia is in the process of evacuating non-essential personnel and is reportedly advising Aramco employees in Dhahran to conduct their work remotely.

That does not indicate a reduction in tensions.

Insights from the Market

State Street's scenario analysis assigns a 20% likelihood to a "1979 redux" scenario, where ongoing kinetic conflict severely impacts energy infrastructure, resulting in Brent prices exceeding $120.

The bank's primary scenario continues to anticipate a future easing of tensions; however, it clearly cautions that another surge is probable before a resolution is reached.

Brent at $115 is not a limit. It serves as a cautionary note.

The war premium has resurfaced, and the market has come to understand that a complete closure of the Strait of Hormuz is not necessary to cause significant disruption. It simply must maintain its high value.

(Edited by Rahul Karunakar; rahul.karunakar@skaahmedia.com)