Oil prices surged over 4% on Friday, reaching their highest levels in over a month, as escalating tensions between the United States and Iran threatened shipping across the Gulf and the potential closure of the Red Sea. Brent crude futures settled $3.87, or 4.59%, higher at $88.10 a barrel, while U.S. West Texas Intermediate futures rose $3.54, or 4.48%, to $82.49. Both benchmarks gained approximately 16% for the week. The renewed hostilities saw the U.S. strike Iranian targets and Iran retaliate against facilities in Kuwait and U.S. sites in the Middle East, including a direct attack in Syria.
The International Monetary Fund (IMF) warns that global oil markets have exhausted their "shock absorbers," making them vulnerable to a significant price spike if the conflict with Iran intensifies. These depleted shock absorbers include existing inventories, which saw an average deficit of 4 million barrels per day from March to May, and increased oil production from countries like the U.S., Venezuela, Guyana, and Russia. The IMF noted that the room to absorb new shocks is shrinking as spare capacity has been deployed and inventories drawn down.
The Strait of Hormuz, which previously handled 20 million barrels of crude and refined products daily, is now seeing significantly reduced flow, with only 1 million barrels on average transiting in May due to Iran targeting vessels. Saudi Arabia has diverted over 70% of its crude exports to the Red Sea port of Yanbu, with shipments averaging 4 million barrels per day recently, up from 973,000 bpd last year. Analysts like Andrew Lipow, president of Lipow Oil Associates, stated that if more tankers come under fire, oil prices will continue to rise as shipowners avoid the Persian Gulf. The U.S. strategic oil reserves are at 319 million barrels, their lowest since 1983, further highlighting the diminished capacity to mitigate supply disruptions.
