Interview, Conference Presentation
$120 Oil Ahead?
- Oil prices have risen approximately $10 per barrel since the onset of the Iran conflict over the weekend, yet Jerome Dortmans (Co-head of Global Oil and Products Trading at Goldman Sachs) characterizes this as a "subdued response" relative to the magnitude of the physical supply disruption.
- The current conflict impacts approximately 20 million barrels per day (bpd) of crude oil production and up to 5 million bpd of refined products, representing roughly 20% of global oil output and 20% of global LNG production.
- Supply flow constraints are critical because viable alternative pipelines (East-to-West in Saudi Arabia or to Fujairah) are either non-existent or have already been targeted, rendering the lost volumes "unhedgeable."
- Existing strategic stockpiles built during the second half of the previous year are projected to be depleted within days if these supply levels remain disrupted.
- Iraq has been forced to shut in production due to full storage capacity, compounding the global supply tightness.
- Dortmans predicts oil prices will trend toward $100 per barrel if the disruption persists for another two to three days, noting that the current $84 trading level does not yet fully price in the duration of the outage.
- If the Strait of Hormuz closure continues, Dortmans forecasts a potential price range between $100 and $120 per barrel.
- Diesel and jet fuel are identified as the most vulnerable refined products; the Middle East is a primary diesel-producing region, while global jet fuel demand (particularly for Europe) maintains high dependency on supply from the affected area.
- LPGs, NGLs, and condensates are also significantly impacted as major export feedstocks for the petrochemical and plastics industries.
- Fuel oil prices have risen due to direct attacks on Saudi refineries, which are major producers of this specific grade.
- Market participants are exhibiting "complacency" and engaging in profit-taking, betting that price spikes are temporary and that the situation will be resolved by the US administration or market forces.
- Dortmans views this complacency as a risky proposition, warning of material inflationary impacts extending into petrochemicals and industries dependent on hydrocarbons.
- The geopolitical calculus has shifted from 20 years ago when the US was a net importer; currently, the primary "short" in the market consists of China and India, who are the primary victims of the shortage.
- While the US and Israel may coordinate via the International Energy Agency (IEA) to mitigate the blow, the US administration's priority may not center on the impact to China as it would have historically centered on US refining systems.
- The trading bias remains "long" on the oil complex based on ground facts, though the market is cautious about a rapid reversal similar to the June event if military objectives are met prematurely.
- A significant risk exists that the disruption becomes a continuous, long-term issue akin to previous Red Sea disruptions if Iran continues to retaliate even after US operations conclude.