Oil Prices Soar to Historic Highs Amid Strait of Hormuz Tensions

The oil market is experiencing a significant crisis due to the ongoing tensions in the Strait of Hormuz. As a result, oil prices have reached historic highs on both sides of the Atlantic. Diesel has broken its all-time high record on September 3rd, with US refiners operating at 98% capacity and the release of 172 million barrels from the Strategic Petroleum Reserve (SPR) having spent its effect.

The impact of this crisis is not limited to oil prices; it also affects other industries. Refining ranks first among all industries in terms of inflationary pressure, according to the Political Economy Research Institute (PERI). The shock waves from this crisis can be felt through freight, farms, utilities, and food, but not directly at the pump.

The situation has been further complicated by Washington's decision to remove Venezuela's oil exports from China's table. Venezuela's state-owned oil company, Petróleos de Venezuela (PDVSA), had previously supplied around 600,000 barrels per day to China, which is now stranded due to the US sanctions. This has left Chinese oil-backed loans worth $10-12 billion at risk of default.

China has been forced to find alternative sources of oil and has turned to Russia as its primary supplier. The price of Russian crude exports to China has increased significantly, with November-loading ESPO oil trading at a premium of +$7 to +$10 over Brent, up from +$2 in early August. This is a significant increase from the previous prices, which were around +$1 and then +$5 two weeks apart.