Oil Rises Despite Washington's Commitment to Protect Supply Flow from Hormuz

SadaNews - Oil extended its gains as new attacks erupted in the Middle East, while traders evaluated a U.S. plan to secure and escort oil tankers passing through the Strait of Hormuz, as shipping activity through this vital corridor had nearly come to a halt.

Brent crude rose towards $83 a barrel after jumping about 12% over two days, its largest increase since 2020, while West Texas Intermediate crude traded near $76.

U.S. President Donald Trump said on Tuesday that the American International Development Finance Corporation would provide insurance for vessels to help ensure the flow of energy and other commercial goods, along with providing maritime escort "if necessary."

Oil Production Disruptions in the Region

This U.S. move follows indications of increasing disruptions faced by producers in the region due to the effective closure of the main trade route.

Iraq, the second-largest producer in the Organization of the Petroleum Exporting Countries (OPEC), has begun to shut down the Rumaila field, the largest in the country, and the West Qurna 2 project, according to people familiar with the matter. Once the shutdowns are complete, the country’s production will come to a near halt. In Saudi Arabia, major oil storage sites are filling up quickly, according to the geospatial analytics company Kayros.

The global oil market has entered a state of disruption due to the U.S.-Israeli war on Iran, with strikes and counterstrikes proliferating across the Middle East.

The war has led to a halt in trade, pushed producers to stabilize production levels, and forced a major refinery and a gas export facility to close. The sharp rise in oil, gas, and petroleum product prices has sparked fears of a global energy crisis.

ING Group stated in a note written by analysts, including head of commodity strategy Warren Patterson, that "maritime escort might become easy targets for Iranian attacks." They added, "Therefore, the U.S. may choose to wait before escorting ships until it assesses the extent of Iran's ability to launch attacks."

Escalating Military Operations and Navigation Halt

Fighting has continued into the fifth day, with the Israeli army stating that it has launched a "broad wave of strikes" targeting Iran. In a separate update, U.S. Central Command announced it had destroyed 17 Iranian vessels and hundreds of launch pads and drones.

Admiral Brad Cooper stated in a video clip posted on the platform "X": "Today, there is not a single Iranian ship sailing in the Arabian Gulf or the Strait of Hormuz or the Gulf of Oman, and we will not stop."

He added that the ships destroyed included "the most operationally ready Iranian submarine, which now has a breach in its side."

As the crisis continues, indicators in the oil market point to a severe supply shortage in the near term. The spot price differential for Brent crude, which is the difference between the two nearest contracts, has widened to $3.15 per barrel in the backwardation scenario, a bullish signal for the market. Just a month ago, the differential was only 71 cents.

The Strait of Hormuz at the Heart of the Energy Market Crisis

The Strait of Hormuz is a narrow waterway connecting the Arabian Gulf to the Indian Ocean, with Iran located to its north. This strait is a crucial passage for global energy trade, with about one-fifth of the world's oil and gas passing through it. Since the outbreak of war last Saturday, tankers have been avoiding this corridor due to escalating risks, including Iranian threats to ships.

Trump wrote on social media: "No matter what happens, the United States will ensure the free flow of energy to the world," without providing additional details about the insurance mechanism that will be offered. The International Development Finance Corporation typically mobilizes private capital for developing countries and reduces investment risks.

Rebecca Babin, the senior energy trader at CIBC Private Wealth Group, said in an interview with Bloomberg Television: "These are just statements for now, so we have to see how it develops in reality."

She added, "What will this military escort look like? What will be the cost of insurance? And will shippers feel a degree of reassurance regarding the offers made to them?"

After Trump's statements regarding the escort plan, Tehran reiterated its warnings to ships in the region. The Iranian Revolutionary Guard stated in a statement reported by the semi-official Fars News Agency that the Strait of Hormuz is in a state of war, and that vessels crossing it "may be subject to missiles or rogue drones." They added that Iran has targeted more than 10 tankers with different projectiles for ignoring its warnings.

Implications of the Closure on the Global Economy

The effective closure of the Strait of Hormuz poses a significant challenge for oil and gas importers, including Asian economies that rely heavily on these supplies.

Some countries, including China, have reserves that might help absorb any short-term disruptions, but prolonged conflict could quickly deplete them.

Alternative supplies from outside the Middle East are likely to be more costly, with rising shipping prices putting pressure on costs.

Vandana Hari, founder of the analytics company Vanda Insights, stated that "the market will not calm down unless evidence of a return to normal navigation levels is observed."

The Paris-based International Energy Agency, which coordinates the release of global oil stocks during times of disruption, held an emergency meeting on Tuesday. They noted that member countries hold over a billion barrels in emergency stocks.

Away from the Middle East, an industry report showed that U.S. crude oil inventories rose by 5.7 million barrels last week. Official data regarding these stocks, which increased by about 16 million barrels in the previous week, is due to be released later on Wednesday.

In the latest transactions, Brent crude for May delivery rose by 1.7% to $82.74 per barrel at 1:37 PM in Singapore, while West Texas Intermediate futures for April delivery rose by 1.2% to trade at $75.46 per barrel.