Middle East Geopolitical Pressures Can Impact Petroleum Markets Everywhere

Oil markets are globally connected and high geopolitical pressures in the Middle East have the potential to impact petroleum product markets everywhere.

That’s what Frederick J. Lawrence, the ex-Independent Petroleum Association of America (IPAA) Chief Economist told Rigzone in an exclusive interview late Monday, adding that “gasoline prices in the U.S. are ultimately linked to the global Brent price of oil which is now caught in a tightening escalatory gyre”.

“The question now pertains to the focus and scale of Israeli retaliation for the 180 missiles launched by Iran on Israel last Tuesday,” Lawrence highlighted in the interview.

Lawrence noted that the Israeli response could target Iranian energy infrastructure such as producing assets, key loading ports, or refining/terminal operations.

“Iranian response to this retaliation could in turn target regional energy infrastructure such as Israeli gas production at Tamar, other regional OPEC or Allied oil and gas/military operations, or even something as large as the Strait of Hormuz,” Lawrence warned.

Each of these options have different threat levels and potential impacts on global oil supply, the ex-IPAA Chief Economist said.

“An attack on Iran could impact between 300,000 to 450,000 barrels per day or up to 1.5 million barrels per day depending on the target,” Lawrence told Rigzone.

“A regional strike by Iran could impact up to five million barrels per day of OPEC supply while an attack on the Strait of Hormuz could impact up to one-fifth of global supply passing through the important conduit,” he added.

“President Biden has tried to use diplomacy to guide Israel away from any attack on Iranian energy infrastructure, especially nuclear facilities but also oil and gas as well,” he continued.

Lawrence stated that higher price of Brent crude or other main global oil prices has the potential to impact the price paid for refined petroleum products.

“Crude oil is the primary driver of gasoline price and, according to the Energy Information Administration (EIA), … crude price directly influenc[es]… 50 percent of the cost of gasoline,” he said.

“In this regard, any attack on global refining/producing operations or key transport chokepoints could impact the price of key refined products such as gasoline,” he added.

“The better news for the U.S. is that the country is more insulated from OPEC and Persian Gulf imports than it was decades ago. OPEC supply in 2023 equated to 16 percent of U.S crude imports compared to 60 percent of U.S. oil imports originating in Canada,” he continued.

“The U.S. is even less reliant on refined products as a net exporter of petroleum products (also the world’s largest global gasoline exporter providing 16 percent of global gasoline exports) and current supply should be ample enough to handle any short-term shock,” Lawrence went on to state.

In the interview, Lawrence told Rigzone that, due to strong domestic production of over 13.3 million barrels of crude oil and seven million barrels of natural gas liquids, the U.S. remains less vulnerable to Middle East oil supply than it was in the 1970s. He pointed out that “this can be seen in the pricing of WTI crude below Brent”.

Lawrence added, however, that the U.S. market still remains directly linked to the global market and noted that, despite high levels of production, the U.S. has fragility when it comes to reserves.

“The U.S. Strategic Petroleum Reserve (SPR) remains way below its full 714 million barrel capacity at a current level of 382.6 million barrels,” Lawrence said.

“The Biden administration has been trying to refill the SPR with a six million barrel purchase recently announced but any major progress will take years,” he added.

“The escalatory situation in the Middle East does have the potential to weigh on global oil supply and prices in the U.S., especially if Middle East production or a major chokepoint such as Hormuz is impacted,” he continued.

Oil Supply Shortage

Any major attack on energy facilities in the Middle East could create a near-term oil supply shortage which could create fuel shortages globally and nationally, Lawrence told Rigzone in the interview.

“The oil markets had received some cushioning lately due to expectations of reduced Chinese oil demand in addition to the recent OPEC announcement of unwinding production cuts beginning in December,” he said.

“This more bearish view of oil markets led to record short positions in crude oil, setting the market up for a large short squeeze based primarily on geopolitical factors,” he continued.

Lawrence noted that the complex political economy of oil and fuel prices can lead to both psychological fears of shortages and higher prices as well as physical pressures on storage and terminals. He said the upcoming election in the U.S. has put gasoline prices in focus as an important data point of inflation.

“Gasoline is the most expensive component of household spending directly related to energy,” Lawrence highlighted in the interview.

“Recently, inflation has been decreasing and the Federal Reserve recently lowered interest rates but an oil price spike could reignite inflationary pressure for key refined products such as gasoline,” he warned.

“Current inventory levels of 221 million barrels of gasoline according to the EIA are roughly similar to year ago levels but Cushing inventories of 23.6 million barrels are near six-month lows,” he added.

“U.S. refineries are running at 87.6 percent capacity and 18 percent of global refining capacity is located in the U.S. According to AAA, the U.S. gasoline price average is $3.182/gallon compared to $3.785/gallon a year ago. Another potential hurricane (Milton) is setting up in the Gulf of Mexico which could impact Gulf Coast production and refining operations,” he continued.

“Given this national energy context leading up to the election in November, the markets will be paying close attention to what happens overseas,” Lawrence went on to state.

The ex-IPAA Chief Economist told Rigzone that escalation in the Middle East can quite easily translate into higher gasoline prices and global shortages given the interconnectedness of global energy markets.

Self Sufficient

In a separate exclusive interview late Monday, Dominika Rzechorzek, an oil and gas analyst at BMI, a unit of Fitch Solutions, told Rigzone that the U.S. gasoline market is broadly self-sufficient with the domestic production exceeding domestic consumption.

“In our view there is limited risk of … gasoline shortages in the U.S. stemming from the conflict in the Middle East and potential oil production disruptions in Iran or even the attempts to blockade the Strait of Hormuz,” Rzechorzek said.

“The key reason behind it is the U.S. high degree of self-sufficiency in gasoline production and exposure to a diverse group of gasoline or gasoline blending components suppliers, primarily non-OPEC countries,” the BMI analyst added.

“This view is also supported by relatively stable gasoline crack spreads in the U.S. over the last weeks, which indicates limited risks of gasoline market tightening in the United States,” the BMI analyst continued. 

Rzechorzek highlighted to Rigzone that, in 2023, the U.S., on average, produced 9,646,000 barrels per day of finished motor gasoline and consumed, on average, 8,945,000 barrels per day.

“The U.S. is in fact the world’s largest net gasoline exporter, according to EIA data,” the BMI analyst highlighted.

“That said, the U.S. finished motor gasoline stockpiles are on relatively low levels, lingering at 16 million barrels in September 2024, on par with 2023 levels, however below 2021-2022 level of 18.5 million barrels per day,” the analyst added.

Rzechorzek told Rigzone that the U.S. imports small volumes of gasoline, “on average 118,000 barrels per day in 2023 (all conventional), which made up 1.3 percent of the U.S. consumption last year”.

“The Bahamas, South Korea, Netherlands and Canada were exporters of finished gasoline to the U.S. in 2023, each contributing between 10-14 percent of total gasoline imports (between 12,000 barrels per day to 17,000 barrels per day on average),” the analyst added.

Rzechorzek noted, however, that the U.S. is more dependent on imported gasoline blending components used in country’s refineries to produce finished product.

“In 2023, the US on average imported 605,000 barrels per day of motor gasoline blending components, with Canada (20 percent), India (10 percent), Netherlands (9 percent) and the UK (8 percent) being top suppliers,” the analyst said.

“The U.S. stockpiles of motor gasoline blending components make on average a vast majority of aggregate gasoline stockpiles in the U.S. and look much healthier compered to finished gasoline inventories, which will also shield the U.S. market from a potential global fuel market disruption,” the BMI analyst went on to state.

In September 2024, blending components stockpiles averaged near 205 million barrels, Rzechorzek highlighted, pointing out that this was slightly below 2023 levels but above 2021-2022 levels.

US Gasoline Price Benchmarks

In the interview, the BMI analyst highlighted that BMI does not expect a gasoline shortage in the U.S. caused by the conflict in the Middle East but warned that “U.S. domestic gasoline price benchmarks are likely to grow along with the increases in the crude oil prices amid raising risk premia related to the conflict”.

“Brent front month price is testing the level of $80 per barrel on Monday, growing from the level of $72 per barrel in the last week of September,” Rzechorzek said. 

“RBOB Nymex gasoline front month price has increased from below USd200/gal in late September 2024 to USd214/gal on October 7, a move primarily driven by the oil price increase as crack spread remains narrow at $9.8 per barrel for October 1-7, compared to $9.9 per barrel, much below the year to date level of $16.5 per barrel,” the analyst added.

“The unchanged crack spread between September and October supports our view of limited signs of the U.S. market tightening. On the contrary, the broader decline in the U.S. gasoline crack spreads over the year indicate weakness on the market, driven primarily by weak demand,” Rzechorzek continued.

The analyst highlighted in the interview that BMI expects gasoline prices to average at USd240/gal between late August-end of 2024, “bringing annual average price to USd246/gal”.

“We note lingering downside risks to this view stemming from weak gasoline demand in the United States. That said, the recent increase in crude oil and broader fuel complex can balance this weakness out,” the analyst added.

To contact the author, email andreas.exarheas@rigzone.com