In just a few short months, the global energy landscape has transformed from one of abundance to one of scarcity. The war in the Middle East has sparked the largest oil supply disruption on record, sidelining an estimated 12 million to 15 million barrels of crude oil per day.
Unsustainable Supply Shock
A supply shock of this magnitude is simply not sustainable. Neither emergency oil releases nor promised production hikes from OPEC+ can fill the gap. The market is signaling major warning signs: contracts for delivery at the end of this month are trading at a hefty premium compared to contracts for subsequent months, indicating that the market believes oil supply is at risk.
Backwardation: A Sign of Scarcity
This phenomenon, known as backwardation, suggests that the market believes longer-term oil supplies are at risk. The price of actual barrels of oil on the ground is increasing even faster – a trend that’s been dubbed “the last bottle of water.” You’re willing to pay anything for it,” said Vikas Dwivedi, global energy strategist at Macquarie Group.
A Scarcity of Refined Products
Potential shortages of refined products like jet fuel, diesel, and gasoline could become a difficult problem for the economy to overcome. Jet fuel prices have doubled over the past month as crude supply problems have translated into supply constraints. Airports typically store just a few days’ worth of jet fuel, and airlines largely stopped hedging and storing their own fuel in recent years.
Airlines Start Canceling Flights
United Airlines plans to cut 5% of its schedule over the next six months – including its key summer travel season. Other airlines have already started raising ticket prices and lifting dreaded baggage fees. Some airports in Italy have introduced fuel restrictions for flights, according to Bloomberg.
A Crisis Unfolds
If the war continues and the Strait of Hormuz remains closed for six to eight more weeks, diesel shortages could become possible – and even gasoline shortages if the strait remains closed through the summer driving season. “It’s like the last bottle of water: You’re willing to pay anything for it,” said Andy Lipow, president of Lipow Oil Associates.
- Futures contracts are trading at a premium compared to subsequent months.
- The price of actual barrels of oil on the ground is increasing even faster.
- Airlines are scaling back their capacity and raising ticket prices.
- Saudi Arabia is charging customers record premiums for its crude.