Crude oil outlook: US-Iran talks; high transit cost in focus

Disclaimer: This article is written by Mohammed Imran, research analyst, Mirae Asset Sharekhan. Views expressed are his own. Readers' discretion is advised. Global crude oil prices eased in last couple of sessions as there had been higher outflow of oil through the strait of Hormuz, as Admiral Brad Cooper, head of US Central Command, said crude and liquefied natural gas flows through the Strait of Hormuz over the past two weeks are running at a six-month high with report of 10 million of oil passing each day, but the shipping tracker data proving companies voicing for higher outflows but around 7-8 million barrels of oil. Shipment from Saudi’s east port have surged with some report showing 14 million barrels were loaded on last Sunday. Crude oil and gasoline prices sold off sharply on Monday, with crude sinking to a 1.5-week low.  Crude prices retreated as increased crude flows through the Strait of Hormuz have eased supply concerns.  Also, hopes that diplomacy will end hostilities in the Middle East weighed on crude prices. US routing for Diplomacy The Whitehouse is signaling a diplomacy route as US President is expected to meet Iranian President today that would be most looked forward event for the street, while US President taking a last-minute U turn from attacking Houthis in Yemen is also signaling the way for diplomatic resolution among the major stakeholders in the war. But the scarcity still remains in the products where US diesel prices reached $6.4/g and at some Pump stations it touched high of $7/g. Shortages of oil tankers raises transit cost The global cost of carrying crude oil which used to be around 1-2 per cent of the total contract value has now faring 20-25 per cent to Asian refiners as the world has been going through acute shortages of supertanker having capacity of 2 million barrels. As the western sanctions on darks fleets which used to carry sanctioned Iranian, Russian, and Venezuelan oil are on sidelines, which makes the available fleet short of meeting the global crude oil demand. Renting one giant oil tanker from Middle East to Asia now costs over $1.2-1.4 million per day. Few months ago, it was much less. Shipping oil from US to Asia now costs $26 extra per barrel, adding $52 million to single shipload that shipping cost equals 25 per cent of oil price itself. Around 15 per cent of the global VLCC fleet is now off Oman, with tankers tied up in ship-to-ship transfers or rerouted around the Cape of Good Hope.  The lack of capex done in the shipping industry in last four years has led to current situation and the news ships would take 2-3 year to come online, hence we expect the transit cost will remain higher for longer even if crude oil prices have to fall in coming months. Global refineries remain a choke point The product shortage would remain a major concern for the policymakers in coming months as the Gasoline Diesel and fertilizers prices would be a direct feed to inflation index. Saudi Arabia suspending Crude oil cargoes for September and October meaning the Yanbu pipeline will take much longer for repair with increased risk of further attacks. Ukraine continued to attack Russia infrastructure that has shunned Russia 50 per cent of refining capacity till mid-September pushing Russia to extend the Diesel export ban, which has kept the European middle distillate higher.   Europe will see a fourth-quarter jet fuel deficit of 510,000 barrels per day, against surpluses of 18,000 bpd in the United States and 419,000 bpd in Asia-Pacific. The third-quarter trend is largely the same. Asian refiners expected to run strong South Korea in September has become the latest large source of jet fuel shipments to Europe, according to flows data. European imports of the fuel from the Asian nation so far in September stand at 129,000 barrels per day, while we have seen that China exported 6 million tons of petroleum products in August up by 53 per cent from July. South Korea's jet fuel output for July hit a seven-year high of almost 13.89 million barrels, while exports reached a 3-1/2-year high, government data showed. An increase in refinery ??crude processing rates has contributed to this rise in output, and traders expect crude runs for August to be firmer than July. Provisional government data showed July refining runs at 2.7 million barrels per day, up by 16 per cent from June. And Indian refiners are also expected to load higher tonnes to European markets to capitalize on the higher crack’s spreads, India’s petroleum basket is having 70 per cent weight of middle distillate as world is running short of roughly 3.5-4 million barrels of refining capacity. Outlook The optimism surrounding diplomatic talks could see oil prices trading under pressure in last couple of trading sessions, however the spot market trades at 15-20 per cent premiums to Brent prices, shows the elevated risk in ME, while supply demand balance is still in short of 3.5 million of supplies, which is expected to improve in Q4 only if US-Iran standoff find a resolution. However, risk of escalation from Iran ahead of Midterm elections to move oil higher in short term. Brent could test support of $95 but the prolonged standoff would mostly be seeing oil moving towards $110-115 by October end.