Oil prices and fuel shipments hit record highs as Iran war chokes Middle East supplies

By Robert Harvey and Georgina McCartney

LONDON/HOUSTON (Reuters) – If you want to buy a cargo of oil in Asia or jet fuel in Europe right now, you may have to pay a record price for it.

Rising oil prices in physical markets – where oil is traded on ships, rail cars or in storage tanks – have outpaced already dizzying increases in benchmark futures markets, as refiners and traders in Asia and Europe are hoarding every barrel they can get to plug the gaping supply gap caused by the US-Israel war against Iran.

That supply gap is expected to persist following a spate of attacks on oil and gas facilities across the Middle East that has become the largest disruption to global energy supplies. ​Iran has also throttled traffic through the Strait of Hormuz, the critical waterway through which 20% of the world’s oil and gas transits, with threats to fire on ships attempting to navigate through the narrow strait.

“It’s going to take longer than people think to get supply back into the market even once the Strait reopens, because we would still have a logistical nightmare,” said Dennis Kissler, senior vice president of trading at BOK Financial.

Oil, gas and refined products are critical to transportation, shipping and manufacturing industries, and shocks to energy supply and prices can hit consumers, businesses and economies hard, damaging demand for months or years.

Crude and condensate flows have fallen by about 12 million barrels a day, or about 12% of daily global demand, due to production cuts and export suspensions by Gulf producers, according to oil shipment tracker Petro-Logistics. Those barrels cannot be easily replaced.

THE PHYSICAL MARKET INCREASES

Futures prices have risen steadily since the United States and Israel attacked Iran beginning on February 28, but movements in physical cargo prices have been much more dramatic.

Benchmark Brent crude hit a session high of $119 on Thursday and then settled at around $109 a barrel. However, the benchmark crude oil price in the Middle East and Dubai hit a record high of $166.80 a barrel. If the cuts persist, Brent is likely to surpass its all-time high of $147.50 reached in 2008, investment bank Goldman Sachs said on Thursday.

Shipments of European and African crude oil have risen to $120 a barrel, and even barrels from Russia, which were heavily discounted due to sanctions, have recovered above $100.

The Mediterranean market was quiet until earlier this week, but even those prices have risen due to fading hopes for a quick reopening of Hormuz, a crude trader said.

“What we are seeing in spot spreads suggests a much tighter system under the headline price,” said David Jorbenaze, global oil market leader at commodities information provider ICIS.

LOOKING FOR SOUR

Refiners have looked further afield for substitutes for Middle Eastern supply, which is mainly medium density and high in sulfur, known in the industry as acid.

Russia’s Ural, a medium-acid crude, has been sold at deep discounts to Brent since that country invaded Ukraine due to sanctions. But that price has skyrocketed, with Urals delivered to India trading at a premium to Brent earlier this month for the first time in history.

In the North Sea, Norwegian medium-acid Johan Sverdrup crude was bid on Thursday at a record $11.30 premium to Brent, an implied spot price of around $124 a barrel. Sour oil typically trades at a discount to Brent because it requires more refining. (CRU/E)

U.S. crude ratings have also risen, although the relative geographic isolation of the U.S. market has opened a huge gap between Brent and the benchmark West Texas Intermediate index, which closed around $96 on Thursday.

However, the reference mars sour produced in the United States Gulf of Mexico, of similar quality to oil produced in the Middle East, is higher. Mars Sour hit $107.53 on March 9, the highest level since July 2008, and was trading at a premium of about $6 to U.S. crude on Thursday.

Prices of key transportation fuels have risen even more than physical crude oil. Jet fuel in northwest Europe hit a record high of around $220 a barrel, according to LSEG data, while European diesel surpassed $200 a barrel for the first time since 2022. Europe relies on the Middle East for both products.

Asian fuel prices rose as refiners cut processing rates, with refinery profit margins for diesel at their highest level since June 2022, at more than $60 a barrel.

On March 11, the United States and other members of the International Energy Agency announced that they would release 400 million barrels of strategic reserves; The United States subsequently waived sanctions on Russian oil barrels. Those measures may not be enough, Jorbenaze said.

“Ultimately, the market runs on barrels moving, not barrels being announced,” he said.

(Reporting by Robert Harvey and Seher Dareen in London, and Georgina McCartney in Houston. Editing by Alex Lawler, Simon Webb and xx)