The oil market continues to move higher this morning as Middle East tension escalates. ICE Brent is close to breaking above $100/bbl. Given developments in the region, it seems only a matter of time before the market tests this key level.
The US carried out additional strikes on Iranian oil tankers near Kharg Island, hitting 5 vessels in response to Iran attempting to strike a US Navy warship. This resulted in Iran firing ballistic missiles towards Jordan, while also warning vessels in the Persian Gulf could be targeted. Recent developments only reinforce the view that we’re still some way from a restart in talks. In the meantime, the market is likely to continue to price in a sizeable risk premium.
Despite the escalation, estimates on oil flows through the Strait of Hormuz are edging higher, with suggestions that flows are in the region of 10m b/d — 50% of pre-war levels. These volumes now look far more in line with what the US previously indicated was moving through the vital choke point.
Preliminary production numbers for OPEC are starting to come in. A Bloomberg survey estimates output in August fell 900k b/d month-on-month to 19.91m b/d. The decline was driven by Saudi Arabia, where output is estimated to have fallen by 1.12m b/d amid the escalation seen through August. The Houthis in Yemen disrupting Saudi shipments from the Red Sea and targeting Saudi energy infrastructure. Yet Iraq and Kuwait continue to increase output, rising 270k b/d and 70k b/d, respectively.
Chinese data shows that crude oil imports in August continued to recover from the lows seen in June. Crude oil imports in August averaged 8.88m b/d, up 5% MoM, and well above the low of 7.15m b/d imported in June. However, import volumes remain significantly below year ago levels, down 24% year-on-year. This leaves cumulative imports over the first eight months of the year down 14.7% YoY. China’s still‑sizeable crude inventories mean lower import levels are broadly sustainable — a dynamic the market may actually need, particularly if Middle East escalation triggers renewed supply disruptions.