Consumers expecting relief from spiraling prices ahead of the midterm elections, are in for a shock. A confluence of factors including an economic Armageddon are likely to drive prices even higher by the end of the year.
Unstable conditions and rewewed threats of Iran violence caused oil prices to spike this week, while China is blowing off its summit with Donald Trump and putting the squeeze on the West.
Trump entertained Chinese President Xi Jinping at the White House Sept 23, hoping to relieve tension between the two countries. But a day or so after Xi returned to China, the government announced that it was suspending all oil exports to the West.
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Trump’s bellicose threats about renewing Iranian attacks after the midterm elections and the arrival of a third aircraft carrier and 10,000 more troops to the Middle East helped to further destablize world oil markets.
Trump told reporters at the White House before departing on a campaign trip that he was weighing options on Iran. “They’ll either sign a very fair deal, or they won’t exist any longer,” he said.
Front-month December Brent crude futures contract jumped on the news to settle at $102.31 a barrel, up 4.37% or $4.28. West Texas Intermediate crude futures finished at $92.87 a barrel, up 2.71%, or $2.45, according to Reuters.
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But that’s not the worst news.
So far, the West and particularly the United States have been moderating world oil supply by releasing strategic reserves.
The Trump administration has commited to provide 172 million barrels from the U.S. Strategic Petroleum Reserve (SPR) as part of a wider 400-million-barrel global emergency draw down under the International Energy Agency (IEA).
The U.S. reserve is at its lowest level since Oct. 1982 after a sustained, 27-week drawdown. The emergency stockpile is currently operating at just 39.7% of its total 714 million barrel capacity.
The reserve, by law, must stop being drained after it hits a 252.4 million barrel federal operational minimum. The remaining reserves would be limited to severe national emergencies. Current Inventory is an estimated 283.77 million barrels.
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It’s expected to hit that shut-off point after the final 40 milion barrels are drawn down under that agreement in November and December.
If other oil sources aren’t restored by then, supply will fall off a cliff and likely drive domestic pump prices above $6 a gallon or higher on average and possibly cause spot shortages.
As of this week, oil flowing through the Strait of Hormuz has rebounded to an estimated 13.1 million barrels per day (bpd), or just under 80% of the 17.1 million bpd pre-war baseline.
But the export of refined petroleum products remains severely constrained, and Iran’s seaborne crude exports are near zero in the face of a U.S. Navy blockade. The blockade is keeping an estimated 1.7 million bpd off the market.
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Chinese refiners have suspended exports of oil products beyond Hong Kong and Macau until further notice, Reuters reported, citing four people familiar with the matter.
“The Chinese export ban suggests concerns about domestic product availability,” UBS analyst Giovanni Staunovo told the wire service.
The latest developments set the stage for rising gasoline pump prices and create further price pressure on diesel fuel, already in short supply and averaging $6.355 a gallon up from $3.70 a year ago.
Gasoline prices had begun to ease after setting records in September. As of today (Oct. 3), the U.S. national average cost for a gallon of regular gasoline is $4.3961, according to the AAA. The price is up 6.69% from a month ago, and 39.15% from a year ago.
While China imports crude oil it exports refined products like gasoline and diesel.
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“It is another source of stress on global fuel markets when supply is severely constrained,” said Hamad Hussain, senior climate and commodities economist at Capital Economics.
Trump administration officials told Germany and France to start releasing emergency diesel reserves or face a potential US diesel export ban. Diesel fuel in the United States is hovering around $6 a gallon on average.
Meanwhile, tensions in the Middle East remain high. Missiles nit three Liberian-flagged oil tankers in the Strait of Hormuz, Marisks said in a Wednesday report.
Iran is preparing a broader and more forceful response if the US resumes large-scale military attacks, according to Reuters. Iranian officials privately say current diplomatic negotiations are unlikely to succeed.
Keith Girard has four decades of experience as an award-winning reporter, editor-in-chief, and senior media executive. Keith’s career began in Washington, D.C., where he was a reporter for The Washington Post and a contributing editor for Regardie’s and Washingtonian magazines. He also worked as a writer/producer in CNN’s Washington Bureau and has written non-fiction books on the U.S. Marines in the Gulf War and Donald Trump and two novels, “The Heidelberg Conundrum” and “The Curse of Northam Bay.”