Petroleum Price Concerns Mount on Middle East Tensions

RedStone Resource

October 18, 2023

The situation in the Middle East is day to day, hour to hour in many instances. Tensions in the region are creating instability and uncertainty regarding the flow of oil and the global supply of oil. The Biden Administration is working to secure additional petroleum (by freeing up some Venezuela oil flows among other things) in the event that Middle East oil flows are disrupted.

If additional conflict expands in the Middle East (specifically to include Iran), uncertainties in the oil sector could push prices higher. This comes at a time when US stockpiles in Cushing, Oklahoma are sitting near historically low levels and the Strategic Petroleum Reserve is also sitting at lows not seen since the early 1980’s.

Petroleum accounts for 44% of the cost of a gallon of diesel, and diesel prices thus far have been able to remain moderate in the near term, despite inventories of diesel also sitting below the 5-year average. Conditions are tenuous and uncertain as mentioned, and there are many moving parts that speculators are trying to process. For instance, insurance companies for Russian crude oil shipments have risen by 50% in recent weeks, and sanctions are making Russian crude oil much higher for back-door channels that have been purchasing it. Iran is also asking OPEC sympathizers to stop sending oil to Israel or Israel supporters (which would include the US). Regardless of whether members carry through on that threat, demand for US exports will rise and that could push the price of US crude much higher. West Texas Intermediate was trading at $88 a barrel recently, and Brent North Sea crude had moved above $91 a barrel.

The New York Federal Reserve’s Global Supply Chain Pressures index has inched up in the past several weeks. This index measures global supply chain congestion (or lack thereof) and helps understand whether capacity is slack or tighter than normal. At this point in time, the index is showing a “normal” relationship and lower than normal global supply chain pressures. That tends to signal that transit times and port throughput is normal, capacity across modes is available, and inventory replenishment is largely predictable.

However, there are some growing concerns about water levels in key waterways, and that is of concern. The Mississippi River is experiencing low water levels in the southern regions of the river, and that is pushing barge operators to remove up to 50% of their cargo. This is a key period of time for grain flows, and those cargoes are going to face higher transportation fees as a result and tighter capacity during this critical period.

The Rhine River in Germany is a different story, water levels at the key chokepoint at Kaub, Germany were below levels that allow full barge flows (again, at the time of writing). The forecast looking forward shows little improvement in the near term for barge flows.

The Panama Canal is still experiencing reduced throughput due to low water levels used to operate the lock system. The average number of days that ships are sitting in queue is now 4.9 days, that is the highest level since the beginning of October, but slightly lower than 6 days of delay from September.

There are also some concerns about conditions in the Suez Canal due to the conflict in Israel. Although, at the time of writing, there were no disruptions taking place.