Old Middle East tensions flare up amid new market transparency

Further escalation of geopolitical tensions in the Middle East is raising oil-market concerns over supply risks, even as US sanctions appear to have already slashed Iranian crude loadings since early May. Despite the upward pressure on prices, however, Kayrros data show the market remains well supplied. Reports of an Iranian shooting of a US drone in the Gulf and of an aborted US retaliatory attack boosted oil prices on June 20–21. Meanwhile on the product front, an explosion at a Philadelphia refinery on June 21 raised concerns about US East Coast gasoline supplies, at a time when US gasoline consumption seasonally rises ahead of the July 4 holiday.

The Gulf’s long-standing role as the world’s leading crude exporter and one of its busiest chokepoints explains the market’s high sensitivity to such regional flareups. For the first time, however, data from satellite imaging provide realtime, measurable contextual information that was utterly missing during past episodes of Middle East tensions. In the past, market analysts relied on supply, demand and inventory data that were both partial and severely lagged when attempting to assess the impact of potential disruptions. Today’s flareup is occurring against a backdrop of unprecedented transparency.

On the surface, the context of the latest Middle East tensions is one of slowing crude inventory builds. After three consecutive weekly builds, Kayrros measurements show global crude inventory movement came to a near halt in the week ended June 16, as draws in Europe and Latin America offset Asian gains. This shift comes on the heels of seemingly reduced Iranian crude loadings since Washington’s decision to let sanction waivers expire in early May.

This stabilization occurs at an elevated base, however, with global inventories at their highest level in roughly two years. And overt tanker loadings are far from a reliable indication of actual Iranian crude exports. Although absolute crude stocks are about flat week-on-week, on an annual basis the overhang has widened to more than 125 million barrels. As in recent months, a drop in overt tanker loadings in Iran appears to hide an offsetting spike in loadings by tankers that have turned off their transponders. While most of these cargoes have yet to land, large volumes of Iranian oil thus appear tied up in transit and could cause renewed builds later this month.

Meanwhile, the very countries that stand to be most directly affected by a drop in Iranian exports or a potential disruption in the Middle East continue to stockpile. Most Gulf exports go to Asia, where crude stocks are up by nearly 80 million barrels year-on-year and have led to the global build. In general, oil-consuming countries at the receiving end of Iranian exports have exhibited contrasting patterns since the end of the waivers. Unlike in Asia, stocks in Europe are down by 20 million barrels year-on-year. Those in Japan and South Korea have been rising lately, even though both countries have cut off their imports from Iran. Indian stocks buck the Asian trend, due in part to a recent reduction in imports from Venezuela.

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