A month ago, a series of news reports said oil flows out of Hormuz had recovered to pre-war levels, pushing oil prices lower. However, the rout did not last. Benchmarks are set for their fourth monthly gain in a row, and no amount of repeating that Gulf states are exporting even more oil than before the war can change that. Because barrels are not the whole story.

“What is the price of oil? Eight months into the war with Iran, what should be a straightforward question has become surprisingly hard to answer,” JP Morgan’s head of global commodities, Natasha Kaneva, said as quoted by the Wall Street Journal this week. The publication noted that Kaneva’s own oil price model suggests a fair value of $94 for a barrel of Brent crude.

Yet Brent crude is trading at over $116 per barrel.

This is only confusing on the surface. Below it, we find an abundance of risks for those shipping crude oil out of the Persian Gulf, dozens of tankers getting hit with drones or missiles in the past few weeks, and a shortage of tankers resulting from Saudi Arabia’s shift to ship-to-ship transfers off the coast of Oman to reduce the risk of having its tankers blown up in Hormuz or the Red Sea.

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Stemming from all this is the issue of shipping costs for crude oil produced in the Middle East. These have soared to all-time highs and prompted producing countries to discount their oil in order to stimulate demand—even though all those reports about improving oil flows in the Persian Gulf served to pressure oil prices. This is because those flows cannot be sustained, not in an environment where the risk of a missile attack is so high. Related: Japan to Overtake China As World’s Top LNG Importer This Year

“This recovery has coincided with a sharp deterioration in maritime security as vessels remain exposed to attacks and insurance and freight costs have risen sharply,” UBS commodity strategist Giovanni Staunovo said, as quoted by the Wall Street Journal.

The war premium on oil, in other words, is alive and well. Yet it is not the only factor driving prices. In the early weeks of the war, some observers were surprised that oil prices were not soaring higher. Indeed, the initial reaction of the oil market to the war was a really optimistic one. Traders—and pretty much everyone else—were sure it wouldn’t last more than a few weeks, and the world was awash with oil, so it had a solid supply cushion.

Yet that modest price increase only took place on the futures market. On the physical market, oil surged. It took several months for futures and physical prices to begin converging, but it appears this is what might be happening right now, with physical prices off their highs from earlier this year. The problem for those hoping for sub-$100 Brent is that eight months into the war, the global supply cushion is gone, the prospect for peace remains elusive, and drivers are paying record-high prices for diesel. The price of oil is reflecting all of this, unlike it did three months ago, when it was being moved primarily by President Trump’s Truth Social posts and reports citing unnamed sources as saying peace was close.

Oil prices currently reflect the reality that the world’s energy supply crunch is not going to be over soon. Even the head of the International Energy Agency, Fatih Birol, said earlier this week the disruption will likely continue well into next year. “I am afraid I don't see any credible pathway that the markets will go next year, where we were before this war has started,” Birol said. He also said the crisis would fuel the acceleration of what he called “The Age of Electricity,” but some have doubts about it—electricity prices are still quite closely tied to the prices of the hydrocarbons that generate most of the world’s electricity.

In addition to all existing trends and developments, prices are stuck above $100 per barrel because of the anticipation of future developments, and more specifically the potential escalation between the United States, Israel, and Iran. President Trump has on several occasions admitted he was considering a return to hostilities after the November 3rd midterms. Iran has responded with its own threats that any return to a hot war would prompt retaliation. In other words, both sides are ready to resume fighting, despite ongoing efforts at diplomacy from Gulf states and Pakistan.

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The midterms are next Tuesday. What follows after them is anyone’s guess but it appears most expect a renewal of hostilities in the Persian Gulf. And that means a higher war premium and a further extension of the energy supply disruption that has become the defining event of this year. Whatever analyst models may suggest, prices are going to stay higher until there is a clear sign that peace is a real possibility.

By Irina Slav for Oilprice.com

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