ES #143: Strait of Hormuz & Brent-WTI Spread

Energy Shots #143

The U.S. struck Iranian nuclear facilities this weekend in a 37-hour operation deigned “Midnight Hammer”. Strikes on several facilities included penetrating (30,000-pound bunker-buster) munitions that ‘obliterated’ fortified sites like Fordow and Natanz.

Iranian officials reiterated plans to retaliate against U.S. aggression after the strike.

This weekend’s headlines quickly focused on the Strait of Hormuz, the chokepoint responsible for oil flows of approximately 20 MMb/d in 2024—roughly 20% of global liquids consumption.

Several of this weekend’s trending articles cited Iranian media outlets with reports that Iran’s parliament approved action to ‘close the Strait of Hormuz’, putting the final decision to Iran’s Supreme National Security Council.

These claims face two immediate obstacles: 1) There is no official record of parliament adopting such a bill, and 2) any action that restricts freedom of navigation through the Strait of Hormuz poses a greater economic threat to Iran than the United States.

Iran relies on the Strait of Hormuz for nearly all crude and refined product exports, including a >90% share from the Kharg Island export terminal alone.

However, as noted last Sunday, threats against the Strait of Hormuz could disrupt a share of total volumes by increasing insurance costs for commercial vessels in the region—no kinetic force required.

Other Forms of Disruption to Watch

While threats to close the Strait of Hormuz warrant the highest level of suspicion, participants should consider potential impacts to regional production that would harm the U.S. economy without directly impeding Iran’s ability to export liquids to China.

Most of the regional producers shown below are unlikely to see impacts from Iran’s pledged retaliation. However, a look at the U.S.’ regional military footprint shows which countries are most at risk of indirect supply disruption:

Side Effects: Brent-WTI Spread

Low Cushing crude stocks and emerging geopolitical supply risks have tightened the relationship between Brent and WTI materially in June. As shown below, the spread between rolling prompt Brent and WTI contracts narrowed by more than 60% from the pre-Israel-Iran average of $3.14/bbl to less than $1.50/bbl following Israel’s initial strikes on Iran less than two weeks ago.

The conflict had a similarly powerful effect on trading volume for the two contracts, with aggregate volume for rolling prompt Brent and WTI narrowly missing 2 MM on June 13 versus a Jan 2-Jun 12 average of 701k.

Watch: Cushing Stocks at Decadal Lows

The Mobius team is available to discuss portfolio-specific opportunities or downstream effects of the evolving Middle East conflict. Please reach out to your Mobius contact or submit a request here.

See you next Sunday.

ES.

This commentary contains our views and opinions and is based on information from sources we believe are reliable. This commentary is for informational purposes, should not be considered investment advice, and is not intended as an offer or solicitation concerning the purchase and sale of commodity interests or to serve as the basis for one to decide to execute derivatives or other transactions. This commentary is intended for Mobius clients only and is not considered promotional material.