The de facto closure of the strait of Hormuz has choked oil supply and sent near-term WTI prices higher, but more recent gains in the long end of the price curve suggest a growing expectation the US-Iran war could drag on longer.
April Nymex WTI settled at $98.71/bl on 13 March, a whopping $31.69/bl gain since 27 February—the day before the US and Israel began exchanging fire with Iran. About three-quarters of this increase were realized in the first week of the war, with the remaining $7.81/bl coming in the second week.
To try to calm markets, US president Donald Trump and his administration last week signaled a potential end to Middle East supply disruptions, claiming the war is "very complete, pretty much". But with the war entering its third week, and Trump calling on allies for military help, contracts on the long-dated part of the price curve have recently garnered more support relative to when the fighting broke out.
For WTI contracts from August to December, inclusive, gains in the second week of the war outpaced the first week. October Nymex WTI, for example, settled at $80.08/bl on 13 March, up by $8.67/bl from a week earlier. This is above the $6.79/bl gain in the week ended 6 March.
"As the war drags on and as the market's expectation of duration continues to extend, it stands to reason that the back end of the Brent/WTI curves continue to grind higher," TD Cowen's managing director of institutional equity research, Menno Hulshof, told Argus on Monday.
About 25pc of globally traded crude volumes and 20pc of LNG supply is unable to leave the Mideast Gulf, with Iran targeting vessels in the strait of Hormuz.
Also at play down the price curve is the market perception of what geopolitical risk premium is acceptable if the situation deescalates or the war ends entirely, said Hulshof.
Trump has promised insurance guarantees as well as naval escorts to get traffic moving again after some providers hiked premiums or cancel war-risk coverage across the Middle East, but those reassurances have so far been unconvincing.
"Most would say that [the risk premium] now needs to be higher on a sustained basis," said Hulshof.
