Oil Price Surge Masks Bigger Energy Shock

Oil prices have surged over 30% in a month to reach $100 a barrel due to renewed US-Iran fighting in the Middle East and attacks in the Red Sea, which are disrupting oil shipments through key routes. While crude prices have increased significantly, shipping costs and refining costs for fuel are rising even faster.

Vishnu Varathan, Asia Pacific head of macro strategy at Mizuho, noted that spot crude price alone is misleadingly benign, as refined-fuel premiums have surged, indicating the energy shock is greater than $100 Brent would suggest. Refined-fuel prices for diesel and jet fuel are doubling or tripling in some cases.

Mizuho estimates shipping costs could rise from $10 to $12 a barrel to as much as $15 to $20 a barrel. The refining premium for diesel alone has nearly tripled to more than $80 a barrel, with the potential supply disruptions facing the market now being larger than at any time during the war.

The squeeze extends to natural gas, with Europe's storage levels remaining low despite the usual winter build-up. Alternative crude supplies have helped cushion the oil market, but refined fuels are rising faster, reflecting growing concern that those products are becoming harder to find.