International oil prices experienced a dramatic rollercoaster ride on Monday. Early in the session, with no signs of de-escalation in Iran-related conflicts and additional major producers initiating output cuts, U.S. WTI crude surged as much as 30%, approaching $120 per barrel. Subsequently, following discussions among G7 finance ministers about a potential coordinated release of strategic petroleum reserves under the coordination of the International Energy Agency, and comments from the U.S. President suggesting the conflict would soon end, prices gradually erased all gains and turned negative. WTI crude fell to around the $80 per barrel mark, pushing it into a technical bear market.
The core reversal occurred after the U.S. President stated on Monday that he believed the war was largely over, noting it had progressed much faster than his initial estimate of four to five weeks. Following these remarks, international oil prices completely surrendered their intraday gains.
Simultaneously, in an effort to stabilize markets, the current G7 chair, the French President, indicated that utilizing strategic reserves was an option under consideration amidst soaring energy prices, contributing to the rapid retreat in oil prices from their highs.
A statement from G7 finance ministers on March 9 confirmed they were prepared to take necessary measures, including potential reserve releases, to support global energy supply. The G7 finance ministers held a video conference that day with leaders from the International Monetary Fund, the World Bank Group, the Organisation for Economic Co-operation and Development, and the International Energy Agency to discuss the current Middle East conflict situation. The statement added that they would continue monitoring developments and energy market dynamics closely and would reconvene if necessary to share information and enhance coordination.
Reports indicated the International Energy Agency was considering releasing 25% to 30% of its total reserves of approximately 1.2 billion barrels, equating to 300 to 400 million barrels. This would represent the largest reserve release since the agency's founding.
The oil market experienced a tumultuous 24-hour period. During early Asian trading on Monday, prices breached $110 per barrel, reaching their highest level since 2022. According to Dow Jones Market Data, WTI crude had surged nearly 36% the previous week, marking its largest weekly gain on record, while global benchmark Brent crude rose 27%, also setting a record for its best weekly performance.
Market panic was primarily driven by the near-closure of the Strait of Hormuz and insufficient crude storage capacity. The Kuwait Petroleum Corporation announced on Saturday it had implemented preventive reductions in crude production and refining, becoming another regional supplier to cut output following Iraq and Qatar.
Meanwhile, inventory levels at major storage facilities in Saudi Arabia and the United Arab Emirates rose rapidly, with storage capacity in both countries expected to reach saturation soon. Additionally, attacks on four oil storage facilities in Tehran, Iran, raised risks of a sharp deterioration in regional supply conditions.
Concerns quickly spread to the refined products market, with participants realizing that diesel, jet fuel, and other supplies would be severely impacted next.
The head of commodity strategy at ING stated that combined production halts and the absence of signs of de-escalation forced the market to price in significant long-term supply disruptions. He noted that even if navigation through the Strait of Hormuz resumed, restoring upstream production capacity would take time.
Market recovery is expected to take time. The impact of oil prices on the global economy is profound, affecting everything from gasoline, jet fuel, utility, and manufacturing costs to inflation, consumer spending, and employment.
The chief research strategist and portfolio manager at investment advisory firm AlphaSimplex explained that rising oil prices boost inflation, erode consumer purchasing power, and drag on economic growth. High inflation, in turn, complicates monetary policy formulation, directly affecting areas like economic growth and employment.
However, some market analysts warn that if the blockade of shipping through the Strait of Hormuz does not end quickly and persists for another one to two weeks, oil prices could still surpass $130 per barrel, even with a strategic petroleum reserve release. A strategist at UBS commented that response measures like using strategic reserves are very limited and would be insufficient compared to the supply gap potentially caused by a prolonged closure of the Strait. He suggested that if normal shipping cannot resume, prices would continue rising until demand is suppressed.
Commodity data analytics firm Kpler estimates that even if shipping resumes, it would take at least one to two weeks for tankers to re-enter the Persian Gulf, load oil from inventories, and restart oil fields. During this period, refiners are expected to increase purchases of alternative crude from other regions, which could lead to a significant widening of the price differential between WTI crude and crudes from other areas.
Reflecting on oil price trends following the Russia-Ukraine conflict four years ago, a macro strategist at BK Asset Management noted that the market did not peak until a month after the International Energy Agency's reserve release. This was due to multiple rounds of European sanctions on Russia and the reluctance of the OPEC+ producer alliance to increase output. In his view, if the U.S., Israel, and Iran can reach a swift agreement, oil prices might stabilize and decline more quickly this time compared to 2022. However, given the event's development, it remains unclear whether the U.S. government's exit path from this conflict will be smooth. The stance of Iran, which recently confirmed a new leader, becomes very critical, as does the stability of the Strait of Hormuz.