Escalating military actions between the United States and Iran have fueled concerns over sustained high energy prices potentially prolonging inflation and increasing the likelihood of further Federal Reserve interest rate hikes. This drove crude oil and refined product futures to strong gains on Friday, capping a week of substantial increases.
Kuwait stated on Friday that Iran had attacked civilian infrastructure including power and desalination plants, marking a significant escalation in regional hostilities. Iran claimed it also targeted US assets in Bahrain, Jordan, Kuwait, Oman, and Qatar, and conducted its first direct strike on Syria. The US reported that, following a reimposed maritime blockade on vessels moving to and from Iranian ports, its forces struck several bridges within Iran to disrupt supply routes to a strategic port and naval base near the Strait of Hormuz.
Fears of further escalation are compounded by the potential for Yemen's Houthi forces to act on threats to block shipping through the Red Sea via the Bab el-Mandeb Strait. With the Strait of Hormuz effectively closed, Saudi Arabia has been rerouting its oil exports through this alternative passage. According to reports, since the conflict began, Saudi Arabia has diverted over 70% of its normal daily crude exports to the Red Sea port of Yanbu. Shipments from Yanbu have averaged 4 million barrels per day in recent weeks, a sharp increase from 973,000 barrels per day during the same period last year.
Analysts at Barclays, including Amarprit Singh, noted in a report that the renewed escalation "poses significant upside risks to energy prices, given that inventories are at multi-year lows and much of the Strategic Petroleum Reserve release is in the rearview mirror." The report added, "As things stand, we believe the oil market remains too sanguine about the potential inventory implications."
On Friday, the front-month August West Texas Intermediate crude oil futures contract on the New York Mercantile Exchange surged 4.5% to settle at $82.49 per barrel. The front-month September Brent crude futures contract on the Intercontinental Exchange jumped 4.6% to $88.10 per barrel. For the week, WTI and Brent futures climbed 15.5% and 15.9% respectively, marking the largest weekly gains for both benchmarks since late April.
Since the conflict disrupted Persian Gulf supplies, gasoline prices have outpaced crude gains due to low inventories. RBOB gasoline futures settled at $3.3927 per gallon on Friday, their highest level since May 22. Diesel futures spiked more than 14% this week, while the US national average retail price climbed back above $5 per gallon.
Beyond fears of Strait of Hormuz supply disruptions, tight supplies during the Northern Hemisphere summer driving season are also supporting gasoline and diesel prices. Data indicates the gasoline crack spread, measuring the price difference between gasoline and crude oil, has averaged $0.90 per gallon so far this month, the highest level in four years.
The front-month August natural gas futures contract on the New York Mercantile Exchange rose 1.8% on Friday to settle at $2.9110 per million British thermal units (MMBtu), but ended the week 1% lower.
Comments