- Freight rates from Middle East to Europe broadly stable
- Bearish oil product market fundamentals dim upside risk
- Lack of energy infrastructure damage alleves supply fears
Mounting strain in the relationship between Israel and Iran has failed to lift tanker freight rates, as key buyers look to preserve calm markets and remain focused on bearish demand sentiment, reports Platts.
Fresh escalation in geopolitical tensions
There were fears that the assassination of Ismail Haniyeh, a top Hamas leader, in Iran, and of Fuad Shukr, a senior Hezbollah commander, in Lebanon, would portend a fresh escalation in geopolitical tensions in the Middle East and cause commodity prices to snap higher. However, oil markets have proved surprisingly stable as ships continue to avoid the Red Sea and traders have proved increasingly less reactive to brinkmanship from both sides of the conflict.
Crude has shrugged off significant increases, rising only a few cents from $81.45/b July 31, when Hezbollah confirmed the death of Shukr, to $81.61/b Aug. 9. Shipping has shown a similarly muted response as bearish sentiment has prevailed across both dirty and clean markets and war risk premiums have stayed rangebound.
Platts assessed the rate to carry a 75,000 mt cargo of refined products from the Persian Gulf to UK-Continent at $53/mt Aug. 8, broadly stable with $53.33/mt on July 31.
Flows from the Middle East to Europe have been dampened by anemic demand for products in Europe and little expected change in trade routes for mainstream shippers already mostly travelling around the Cape of Good Hope to avoid the Red Sea, shipping market sources said.
For crude carriers, Platts assessed the rate to carry a 140,000 mt cargo from the Persian Gulf to UKC at $54.75/mt Aug. 8, up a touch from $50.50/mt July 31. The dirty tanker market is in its typical summer lull and this has limited upside in the market, trade sources said.
Trade flow resilience
While markets remain watchful for sign of an Iranian retaliation, traders have become increasingly reluctant to price in higher risk premiums as supply chains have adapted.
Around 60% of tankers bound from Europe from East of Suez in the second half of July have opted to sail the longer Cape of Good Hope route to avoid the Red Sea, reflecting limited volatility since tanker operators began reassessing voyages earlier this year, according to S&P Global Commodities at Sea data.
For Europe, record volumes of US diesel imports have also helped to minimize exposure to Middle Eastern flows, while a broader bearish sentiment on oil-products demand had limited upside sensitivity to the latest signs of escalation.
Rebeka Foley, an oil analyst at S&P Global, noted easing gasoline and diesel cracks as tensions have mounted as a vote of confidence around product availability in the coming months. “Ongoing ICE gasoil backwardation is implying that low stock levels are adequate to cover prompt demand. We also have high runs/low outages in the US and Europe, meaning that gasoline cracks should come off end-August,” she said.
Geopolitical interests
Benjamin Hoff, head of commodity research at Societe Generale, agreed that confidence in newly established trade flows has diluted upside risk in the downstream market. “The market took Houthi rhetoric following the assassination of Hamas leader Haniyeh in its stride,” he said Aug. 12, noting a counter-intuitive increase in short positions on ICE gasoil futures after the July 31 assassination.
Arne Lohmann Rasmussen, chief analyst at Global Risk Management, said that widely anticipated retaliatory measures can now even trigger an oil market selloff once they materialize, by briefly dissipating expectations of an imminent attack.
Meanwhile, after months of tit-for-tat attacks and fraught relations within the region without significant disruption to energy infrastructure, several analysts have underscored mutual interests in keeping oil flowing.
“Iran would have little to no strategic gain by purposefully attacking oil infrastructure in the region. That is not to say it won’t happen, perhaps by accident or on purpose. But such attacks would spur responses against Iran. And China, an Iranian ally of sorts, would not like to see higher oil prices or supply threatened,” said Jim Burkhard, Commodity Insights’ vice president of oil markets, energy and mobility.
“Causing damage to regional oil supply would not win Iran any friends or support apart from its proxies and like-minded actors. But in times of war, economic logic and long-term repercussions are often set aside,” he said.
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Source: Platts
