Commentary: Big Tent Ideas

New Houthi Threat Makes Future Of Oil Prices Look Even Uglier

Unsplash/Zetong Li

Oil prices are surging again amid renewed fighting between the U.S. and Iran that has again halted tanker traffic via the Strait of Hormuz.

The U.S. domestic West Texas Intermediate price index hovered near the $85/bbl mark early Tuesday, representing a rise of more than 25% since the ceasefire MOU between the two countries collapsed in early July. Thus, the affordability optimism felt by U.S. drivers and consumers in June returns to the pocketbook strains of March through May, as the average price for gasoline once again tops the $4/gallon threshold.

All these swirling risk factors were enhanced this week by rising threats by the Houthi rebels in Yemen to resume firing on ships exiting the Red Sea via the Bab el Mandeb strait.

A shutting down of that crucial choke point would make it far harder for Saudi Arabia to get its 7 million barrels per day out onto the open market since the Suez Canal can’t accommodate the biggest class of crude oil tankers. Al Jazeera reported Tuesday morning that two big Saudi tankers made U-turns to return to port amid Houthi threats.

Further exacerbating the situation is the fact that the supply buffers which helped keep a lid on price shocks early in the conflict are fast disappearing. Without a quick resolution to the conflict, current market conditions mean the cost of energy has nowhere to go but up.

When the Iran Conflict kicked off on March 1, markets enjoyed the following set of supply buffers:

• A big inventory of crude oil already “on the water,” i.e. being held in crude tanker ships.
• Healthy balances held in an array of national strategic petroleum reserves (SPR), including in the United States SPR.
• Normal to above-normal storage levels in major onshore storage sites like Cushing, Oklahoma.

Add the quick decision by China to tap its own strategic reserves to replace the lost import volumes it had been receiving from the Persian Gulf countries, and the market enjoyed an array of supply buffers that helped prevent a price shock that would have rivaled the 2008 shock that saw crude prices rise as high as $147/bbl. Now, some analysts are concerned that scenario could be in play and traders who erred on the side of optimism during March through June are trending in the opposite direction as the Middle East risk factor returns.

Commercial crude oil inventories around the world, excluding strategic petroleum reserves, have been dropping rapidly. U.S. crude stocks fell another 564,000 barrels in the week ending July 10, according to the latest EIA data reported by OilPrice.com.

That marks the third straight month of steep declines, with more than 60 million barrels withdrawn over the past twelve weeks. Gasoline inventories are also shrinking and now sit 6 percent below the five-year seasonal average. Far from normal drawdowns, these low levels reflect a market that is too tight for comfort.

The SPR itself offers even less protection than in past crises.

Recent figures show the SPR at just 316.5 million barrels, the lowest level since 1983 and more than 415 million barrels below full capacity. At current rates, further releases would push it dangerously close to operational minimums and threaten the structural integrity of the underground caverns in which the oil is held.

The Trump administration’s deployment of the SPR in this crisis fits the reserve’s intended mission, but Energy Secretary Chris Wright and the Department of Energy were saddled with an already depleted situation thanks to the purely political drawdown ordered by Joe Biden in the leadup to the 2022 midterm elections.

Demand pressure is compounding the problem. Chinese refineries have resumed large-scale crude purchases, layering more supply pressure onto an already strained system. At the same time, bipartisan legislation advancing in Congress, including the late Sen. Lindsey Graham’s expanded sanctions package targeting Russia’s energy sector and dark fleet, could further restrict Moscow’s oil exports. Every barrel removed from the market tightens supply even more.

All these factors combine to create a potent cocktail for more price spikes. If President Trump can succeed in permanently securing the Strait of Hormuz and cut off Iran’s demands on the Houthis, the immediate threat of a major price surge can be contained. If not, American consumers will likely pay a literal price at the gas pump for months to come.

David Blackmon is an energy writer and consultant based in Texas. He spent 40 years in the oil and gas business, where he specialized in public policy and communications.

The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller News Foundation.