Risk Premium Rises as Strait of Hormuz Nears Total Blockage, Oil Rises!
Oil prices rose on Thursday (March 5th) as the market increased its risk premium amid concerns about supply disruptions due to the escalating conflict in Iran and the disruption of shipping in the Strait of Hormuz. Brent rose to US$83.65 per barrel, while WTI strengthened to US$76.19 per barrel at the time of writing.
This increase occurred as the risk of supply disruptions collided with limited output at several production facilities, leading the market to assess tighter near-term supply conditions. The primary focus is on the Strait of Hormuz, a crucial passageway for nearly a fifth of global energy consumption. Shipping activity is reportedly nearing a "total standstill" for the fifth day, increasing logistical risks and potential shipping delays.
Geopolitically, tensions are rising after the US-Iran conflict reportedly escalated on Wednesday, including a US strike on an Iranian warship off Sri Lanka. In Washington, Senate Republican support for President Donald Trump's military campaign has reinforced the perception that the escalation could last longer. Their rejection of a bipartisan resolution aimed at halting air operations and requiring Congressional authorization for hostilities against Iran has further heightened market concerns, particularly in energy assets.
Physical supply pressures are also said to be growing from the Gulf region. Iraq, OPEC's second-largest producer, is reportedly cutting production by nearly 1.5 million barrels per day due to limited storage and export channels. Meanwhile, Qatar has declared force majeure on gas exports, and sources say restoring normal production volumes could take at least a month. This combination of output cuts and export constraints reinforces the narrative of tight supply, although the current source of disruptions is more likely to be distribution and shipping.
Security risks in regional waters have also weighed on sentiment. The UK, through its maritime trade operations agency, reported a large explosion heard and seen by the captain of a tanker anchored about 30 nautical miles southeast of Kuwait, before a small vessel was seen leaving the area. These developments heighten concerns about shipping safety and increase the likelihood of operational disruptions in shipping lanes.
J.P. Morgan noted that Iran has so far refrained from attacking most critical energy infrastructure, but shipping risks remain very high, with an estimated 329 oil tankers stuck in the Gulf. The bank believes the duration of the US campaign could be limited by the storage capacity of GCC countries and current energy price levels. Technically, many oil fields are considered capable of returning to full capacity within days and returning to full capacity within 2–3 weeks, but the main constraints currently lie more in logistics than production conditions, particularly in Iraq, which relies on water injection to maintain reservoir pressure.
Going forward, oil price movements will be heavily influenced by security dynamics in the Strait of Hormuz, the smoothness of shipping and cargo insurance, and indications of a recovery in exports from Iraq and Qatar. The market will also be closely monitoring whether the escalation of the conflict leads to broader disruptions to Middle East energy flows or if it subsides, eroding risk premiums. (asd)
Source: Newsmaker.id
