Oil heads higher
Hormuz and Bab el-Mandab closed is only the start. They remain closed until the US leaves the region. But without US security, tribal and sectarian Arab uprisings will spread.
The closure of Hormuz and now Bab el-Mandab by the Houthis, plus the damage inflicted on the Saudis’ East-West pipeline to Yanbu is about to hit global energy markets hard now that US strategic oil reserves are effectively depleted. Furthermore, with the Saudis, Kuwaitis, Qataris, Bahrainis, and the UAR losing nearly all their oil, gas, and derivatives income the ruling families face a major financial crisis.
We have become increasingly familiar with the crack spread, which has risen from its normal $10-$15 margin over crude oil to $70:
The crack spread reflects the loss of global refining capacity, much of which is locked up in the Persian Gulf plus Russian refineries being damaged by Ukrainian drones. The additional problem now emerging is of significantly higher oil prices for the reasons stated above.
Demand for the downstream products extracted from oil is mostly inelastic, meaning that higher prices don’t reduce demand. Diesel, kerosene, and ship bunkers are vital for global logistics over land, air, and sea respectively. Diesel is also essential for farming, mining, and transport. And heating oil which is similar to diesel and kerosene will see increasing demand during the northern hemisphere’s winter which is now approaching. Therefore, we are likely to see crack spreads being maintained or even increased as oil prices rise, accelerating their price increases even more.
So far, financial markets have been remarkably complacent appearing to accept US Government war propaganda over verifiable facts. Not only have the US and Israel lost their war against Iran, but they cannot admit it — particularly ahead of the US mid-terms on 6 November and Israel’s general election on 27 October.
The closure of Hormuz continues and will do so until the US withdraws from the region. Even then, oil industry experts say that it will take years for the Gulf to return
