Brent Retreats as Gulf Risks Persist: What Is the Oil Market Pricing In?

The move

Brent crude futures fell $2.28, or 2.2%, to $103.78 a barrel by 07:29 GMT on Thursday, October 15, and US West Texas Intermediate futures fell $1.34, or 1.4%, to $93.75, Reuters reported. Both were reversing gains from Wednesday. These are intraday futures quotes, not settlement prices; the day's settlement was not available at this edition's cutoff.

What pushed prices down

A US official said on Wednesday that the administration was considering easing sanctions on some of Russia's so-called shadow-fleet tankers, Reuters reported. PVM Oil analyst John Evans said such a move could help lower freight rates and increase flexibility in diesel shipments. The talks follow President Trump's temporary lifting of sanctions on Russian diesel, according to Reuters.

What is holding them up

A container ship and a dry bulk carrier both sank near the Strait of Hormuz within 24 hours after being hit by projectiles in separate incidents, maritime officials said on Wednesday, according to Reuters. Iran has said it is stepping up strikes in response to the US blockade of its ports and tougher sanctions. “The ongoing conflict between Saudi Arabia and the Houthis is keeping a geopolitical premium in oil markets but energy infrastructure has not been attacked in the last several days,” MUFG analysts said in a note quoted by Reuters.

Ukraine also struck a Russian refinery in the Ryazan region, Reuters reported. In the US, industry data cited by market sources showed crude inventories fell 11.1 million barrels in the week to October 9, a much bigger draw than analysts expected; official Energy Information Administration figures were due later on Thursday.

Supply outlook and alternative routes

The International Energy Agency, in its October oil market report published on Wednesday, cautioned that constraints on diesel markets could continue well into next year, with fresh attacks on Saudi Arabia threatening to derail a recovery in oil supply, CNBC reported. Singapore's maritime authority called the sinking of a Singapore-registered ship in the strait “unprovoked, unjustifiable and a breach of international law.” Iran has said it is “counting the moments” until it can strike US warships, according to CNBC.

Some factors are limiting the upside. “Saudi crude continues to reach international buyers through alternative routes, while accelerated emergency stock releases by IEA members provide an additional buffer, preventing a sharp rise in prices,” Firas Bechwaty of trading platform ICM said, according to CNBC. He added that the lack of progress in US-Iran diplomacy “leaves little immediate prospect of a full reopening of the waterway.” CNBC quoted December Brent at $104.52, down 1.5%, at a slightly different time from the Reuters quote above.

Why it matters

Analysis: The market is weighing two kinds of risk. Attacks on shipping raise the cost and danger of moving oil, but, as MUFG noted, energy infrastructure itself has not been hit in recent days. Possible sanctions relief would add tanker capacity rather than new oil. Neither factor alone explains the price level, and the sources do not quantify how much of Brent's price is a risk premium.

What to watch: the EIA's weekly inventory report, any formal US decision on shadow-fleet sanctions, and further incidents near Hormuz.