With the Strait of Hormuz closed and stocks running low, oil prices can only go up. Lanza and Paltrinieri have their say

With the conflict between the United States and Iran appearing to have returned to a critical stage, following further US air strikes and Iranian retaliatory actions over the weekend, the rapid reopening of the Strait of Hormuz – on which the market had been pinning its hopes – now seems like a mirage. The oil stocks with which the world has replaced the barrels blocked in the Persian Gulf are running low, and the energy crisis now risks worsening: yesterday morning, Brent crude exceeded $90 a barrel, before falling back towards $88 following cautious opening negotiations brokered by Qatar; however, this figure does not in itself represent an all-time high but reflects a rise of $20 in just two weeks. “Between late July and early August, the release of US strategic reserves will come to an end. So far, the shortfall in supply has been made up from reserves, but without further releases and with ten million fewer barrels per day, this is not sustainable,” Andrea Paltrinieri, professor of the Economics of Financial Intermediaries at the Catholic University of Milan, told "Il Foglio".

“Most analysts now regard instability as a certainty, at least until the end of the year,” argues Alessandro Lanza, director of the Eni Enrico Mattei Foundation. “There is an ongoing conflict, as well as a double blockade: Iran is closing the Strait to traffic, whilst the US Navy is blocking access to Iranian ports. Even if the Strait were declared open tomorrow, ships would not pass through anyway: there are still anti-ship missiles and Pasdaran patrol boats, drones, and GPS signal jamming, all of which make navigation unsafe. Insurance companies do not cover this level of risk. Even Iran, if it wanted to, probably could not guarantee safe passage: a stretch of sea in the midst of a full-blown military crisis would have to be cleared, and that would take months.”

Paltrinieri attempts to explain the crisis by breaking it down into three main themes: political and military stances, oil flows, and stockpiles. “The positions of Washington and Tehran have not changed; on the contrary, they have become more polarised,” says the professor from the Catholic University. This is because negotiations have now stalled over an issue that practically did not exist: “Three months ago, the priority was enriched uranium and the nuclear programme; now, however, the starting point is control of the Strait, which is in the hands of the Pasdaran – you have to send them an email to pass through the Iranian lane, as the Omani lane is not in use. And the nuclear issue still needs to be addressed.” Added to the deadlock in negotiations are the oil flows, and Paltrinieri explains: “In the ten days during which the Memorandum of Understanding appeared to be in force, Iranian oil tankers alone transported 60–80 million barrels out of the Strait, most of which were bound for China. But the real overarching issue is that ships must return in order to free up storage capacity in the various producing countries and allow production to resume: I’m thinking of Kuwait, the United Arab Emirates, or Iraq. Saudi Arabia has partly circumvented the blockade via the pipeline that emerges at Yanbu on the Red Sea (with a capacity of 4.5 million barrels a day, ed.), and that is why prices are not at $120.” Yesterday, however, the Houthis announced a maritime embargo “with immediate effect” against Saudi Arabia, but as yet there have been no reports of attacks or an actual blockade of the route.

And as regards supply flows, the shortfall in barrels could now lead to further price rises, given that Beijing has returned to the market: “There is a shortfall of up to ten million barrels a day. China, which in June was importing almost 5 million barrels a day less than a year earlier, has resumed imports,” explains Paltrinieri. He then moves on to the third topic, that of stocks: “Washington has released its strategic reserves, which will be depleted between late July and early August. At various delivery points – from Cushing in Oklahoma to Rotterdam – stocks are nearing ‘tank bottom’, the very bottom of the tanks. Over the last three days, backwardation has intensified – that is, the difference between the front-month and back-month contracts (the price of oil for the nearest delivery date has become much higher than that for a later delivery date, ed.). This implies fears of a persistent supply shortage,” adds Paltrinieri. “When there is no oil, prices must obviously rise to levels that ration demand.”

And Lanza, director of the Eni Mattei Foundation, concludes: “But the problem isn’t just petrol: it’s also LNG, of which Qatar is one of the largest producers and Japan one of the largest buyers. And around 40 per cent of fertilisers pass through the Strait, so price rises are likely to follow one after another.”