Written by Samer Hasn, Senior Market Analyst at XS.com
(MENAFN- MENAFNEditorial)
West Texas Intermediate and Brent crude futures are rising by more than 1 percent in early trading this morning.
Opposing factors are keeping the oil market sideways. On one hand, the US administration is heading toward temporarily refraining from escalation and achieving a degree of calm ahead of the midterm elections. On the other hand, I see only prospects for broad multi-front escalation in the Middle East, keeping the risks of renewed targeting of energy infrastructure high.
The market may remain fearful of a renewed disruption and loss of supplies whether in the Strait of Hormuz or the Red Sea as long as escalation risks stay high, risks that could make the millions of barrels flowing from the region a thing of the past if energy infrastructure is targeted once again, which could justify the return of rising prices for the third consecutive session.
On another front, President Donald Trump announced a ceasefire between Russia and Ukraine regarding energy facilities, along with Russia's intention to supply the global market with diesel. However, I see no reason to be optimistic about Trump's claim, as Ukrainian President Volodymyr Zelenskyy said to Axios that the announcement "was news for me." Furthermore, what Russia will offer in diesel under this planned agreement over the coming months is less than half of daily global consumption. For example, if Russia exports 500,000 tons of diesel (equivalent to 3.73 million barrels) during November, this amount is barely enough to cover US consumption for a single day, which stands at around 3.6 million barrels per day. Even this small export volume depends on Russia and Ukraine refraining from targeting energy facilities, which I doubt.
In any case, the glass half full here suggests that the US administration is seeking to force a decline in crude and refined product prices over the next few days, and may refrain from anything that could reverse that, which could help prevent crude prices from continuing to surge. Yet even this remains an unproven hypothesis.
Furthermore, in the Middle East, the prevailing gray environment generally may not be sustainable for more than a few days or weeks. After the elections pass and even before then, we may see a convergence of desires toward multi-party and multi-front escalation. On the Iran front, we saw more pessimism when Mohsen Rezaee, head of the Iranian Supreme National Security Council, said the US response to reaching an agreement that would open the Strait of Hormuz was insufficient. This suggests the country is not ready to make core concessions on any of the main issues, at a time when its floating oil inventories in Asia are running near depletion, and it has warned that it would strike regional exports unless it can export as well.
In addition, the US military buildup in the Middle East and the absence of a clear intention to make concessions to Iran or withdraw from the war entirely and throw it onto the shoulders of regional countries suggest to us that US military escalation could return, and if that happens, it may be sometime in November or its second half. Moreover, providing direct protection for transiting tankers in the strait by US forces is extremely costly. It may not be sustainable, making it necessary to address the source of the threat in Iran by one means or another, which leaves the door open for a return to escalation given the lack of prospects for reaching an agreement.
To make matters worse, this potential collision could intersect with the front between Saudi Arabia and the Houthis in Yemen heading toward further deterioration. We saw widespread strikes on airports and oil export infrastructure in the Kingdom by the Houthis, placing the former before a series of difficult choices. Either a full-scale military solution, which would plunge the Kingdom into an asymmetric war in which the Houthis have demonstrated their ability to inflict structural damage, according to Kristian Coates Ulrichsen, a Gulf expert and fellow at Rice University Baker Institute, speaking to the Wall Street Journal. This war could be perpetual, with no near end. It may not serve either party's interests, achieving only the goals of those seeking to extend regional influence or maintain international influence in the energy market.
The other option is returning to negotiations, where the Houthis will have high demands, and peace prospects are slim in the current environment. I believe peace remains the ideal option for both sides, serving their shared interests and preventing prolonged exhaustion, which I hope will happen despite the lack of near-term prospects. Meanwhile, if Saudi-Iranian diplomatic efforts bear fruit, they could lead to a temporary calm between the two parties, paving the way to restore the situation that preceded the escalation past July. Still, it is too early to talk about this narrative before seeing its outlines.
Accordingly, I believe crude prices may remain stuck in a wide sideways path over the next few days, punctuated by waves of escalation and efforts to prevent worsening price surges that carry a high political cost for Trump and his party.
Regards
West Texas Intermediate and Brent crude futures are rising by more than 1 percent in early trading this morning.
Opposing factors are keeping the oil market sideways. On one hand, the US administration is heading toward temporarily refraining from escalation and achieving a degree of calm ahead of the midterm elections. On the other hand, I see only prospects for broad multi-front escalation in the Middle East, keeping the risks of renewed targeting of energy infrastructure high.
The market may remain fearful of a renewed disruption and loss of supplies whether in the Strait of Hormuz or the Red Sea as long as escalation risks stay high, risks that could make the millions of barrels flowing from the region a thing of the past if energy infrastructure is targeted once again, which could justify the return of rising prices for the third consecutive session.
On another front, President Donald Trump announced a ceasefire between Russia and Ukraine regarding energy facilities, along with Russia's intention to supply the global market with diesel. However, I see no reason to be optimistic about Trump's claim, as Ukrainian President Volodymyr Zelenskyy said to Axios that the announcement "was news for me." Furthermore, what Russia will offer in diesel under this planned agreement over the coming months is less than half of daily global consumption. For example, if Russia exports 500,000 tons of diesel (equivalent to 3.73 million barrels) during November, this amount is barely enough to cover US consumption for a single day, which stands at around 3.6 million barrels per day. Even this small export volume depends on Russia and Ukraine refraining from targeting energy facilities, which I doubt.
In any case, the glass half full here suggests that the US administration is seeking to force a decline in crude and refined product prices over the next few days, and may refrain from anything that could reverse that, which could help prevent crude prices from continuing to surge. Yet even this remains an unproven hypothesis.
Furthermore, in the Middle East, the prevailing gray environment generally may not be sustainable for more than a few days or weeks. After the elections pass and even before then, we may see a convergence of desires toward multi-party and multi-front escalation. On the Iran front, we saw more pessimism when Mohsen Rezaee, head of the Iranian Supreme National Security Council, said the US response to reaching an agreement that would open the Strait of Hormuz was insufficient. This suggests the country is not ready to make core concessions on any of the main issues, at a time when its floating oil inventories in Asia are running near depletion, and it has warned that it would strike regional exports unless it can export as well.
In addition, the US military buildup in the Middle East and the absence of a clear intention to make concessions to Iran or withdraw from the war entirely and throw it onto the shoulders of regional countries suggest to us that US military escalation could return, and if that happens, it may be sometime in November or its second half. Moreover, providing direct protection for transiting tankers in the strait by US forces is extremely costly. It may not be sustainable, making it necessary to address the source of the threat in Iran by one means or another, which leaves the door open for a return to escalation given the lack of prospects for reaching an agreement.
To make matters worse, this potential collision could intersect with the front between Saudi Arabia and the Houthis in Yemen heading toward further deterioration. We saw widespread strikes on airports and oil export infrastructure in the Kingdom by the Houthis, placing the former before a series of difficult choices. Either a full-scale military solution, which would plunge the Kingdom into an asymmetric war in which the Houthis have demonstrated their ability to inflict structural damage, according to Kristian Coates Ulrichsen, a Gulf expert and fellow at Rice University Baker Institute, speaking to the Wall Street Journal. This war could be perpetual, with no near end. It may not serve either party's interests, achieving only the goals of those seeking to extend regional influence or maintain international influence in the energy market.
The other option is returning to negotiations, where the Houthis will have high demands, and peace prospects are slim in the current environment. I believe peace remains the ideal option for both sides, serving their shared interests and preventing prolonged exhaustion, which I hope will happen despite the lack of near-term prospects. Meanwhile, if Saudi-Iranian diplomatic efforts bear fruit, they could lead to a temporary calm between the two parties, paving the way to restore the situation that preceded the escalation past July. Still, it is too early to talk about this narrative before seeing its outlines.
Accordingly, I believe crude prices may remain stuck in a wide sideways path over the next few days, punctuated by waves of escalation and efforts to prevent worsening price surges that carry a high political cost for Trump and his party.
Regards
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