Indeed, underwriters, reeling from $25 billion in infrastructural damage across the region, either suspended coverage or re-priced it so aggressively that it didn’t make any financial sense to restart operations. So now, one of the things we have to see, one of the macroeconomic fundamentals, is the issuance of insurance contracts to these vessels passing through the Strait.
The US/Russia/Venezuela Sanctions Reversal
The US got pragmatic as energy prices shot up. Indeed, the drone attacks on the Russian domestic refineries that were intended to cripple Moscow’s war machine, actually provided the world with a lifeline. Russia was forced to export raw crude rather than refined products and flooded the markets. The US chose to look the other way.
Simultaneously, there was an easing of restrictions on Venezuelan heavy crude (as Maduro was no longer there), leading to the widening of the discount between WTI to Brent Crude, the largest in about 8 months. Monitoring the spread between these instruments could also give us a clearer direction to the realignment of the pricing landscape.
The UAE’s Exit From OPEC
What we also saw from this debacle was a fracture within OPEC. Abu Dhabi spent years, and billions, expanding its production capacity to 4.85 mb/d, eyeing a 5 mb/d target for 2027. Now the UAE reached a point whereby adhering to cartel quotas meant stranding its own upstream capital. So they did what they had to do. They left. We might see more of this in a port-Hormuz world. Independent volume generation will be more valuable than collective price management. The increased competition on volume could impact prices in the medium to long term.
US Running at 95% and Still Falling Behind
In the US, domestic refineries are at a 94.5% utilization rate but they are still falling behind a vanishing inventory curve. Crude stocks fell by 3.3 million barrels in a single week in late May, while Strategic Petroleum Reserve (SPR) draws of 9.9 million billion barrels have pushed combined domestic stocks to an 11–month low of 819.2 million barrels. So yea there’s a lagged nature of relief. While the Baker Hughes rig count jumped to 558, the largest rise in 4 years, Enverus daily GPS tracking shows a more aggressive 600+ rigs already in the field. Despite this surge, the physical barrels from these new Permian wells are months away. The inventories are not filling up on time. If this scenario continues, it is expected that WTI crude could remain elevated for some time.
