Prolonged US-Iran Conflict to Send Oil Prices Soaring

Oil industry executives are bracing for a prolonged war between the United States and Iran in the Persian Gulf, which could lead to higher oil prices for an extended period. The mood at this year's Asia Pacific Petroleum Conference was bleak, with delegates suggesting that achieving peace would be a challenge due to the 'war of egos' between US President Trump and Iranian leadership.

APPEC delegates believe that Trump should leave the Persian Gulf and let local countries deal with the mess left by US and Israeli strikes on Iran. However, this scenario is unlikely, leaving drillers, traders, and refiners in Asia to prepare for a long disruption in oil flows out of the Middle East.

The implications of a prolonged war are severe, with Brent crude prices above $100 per barrel and physical delivery prices even higher. The US naval blockade on Iranian ports and the grab for Venezuelan crude have cut off two main supply channels, driving up prices of Russia's ESPO blend to a premium of $20 per barrel over Brent.

Traders are starting to focus on physical prices rather than futures market charts, which had previously missed the rising costs due to surging insurance and freight rates. Tanker rates have hit an all-time high as escalating risks to shipping in and out of the Middle East prompt traders to take inefficient and expensive trade routes.

The fuel crunch is getting increasingly severe, with industry executives warning that a prolonged war for the Strait of Hormuz will make matters worse. Refineries are running at higher than normal rates to make up for lost production from the Middle East and Russia, but this has not been enough due to limited capacity.