What a Middle East Oil Price Shock Could Mean for American Consumers

Good morning and welcome back to Energy Source, coming to you from New York.

More than a million homes were without power in the southeastern United States last night after Hurricane Helene ravaged the region, killing more than 180 people and making it the deadliest storm since Hurricane Katrina in 2005.

In West Texas, former President Donald Trump hosted a private fundraiser in Midland yesterday, where he pitched to oil-for-money donors as his campaign enters its final stretch.

The world is holding its breath as it awaits Israel’s long-awaited retaliation against Iran for its missile barrage on Tuesday. The FT has a breakdown of how the IDF might respond, including attacks on Iran’s missile launchers or oil infrastructure.

Today’s Energy Source reveals what this rapid escalation in the Middle East could mean for the US oil market, just as the country prepares to vote in the presidential election.

Thanks for reading,

Amanda

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Is the US Prepared for a Middle East Oil Shock?

The prospect of an all-out regional war in the Middle East is higher than ever this week as the world prepares for Israel’s response to Iran’s missile attack.

The rapid escalation has awakened an oil market that had otherwise been pleased by the Middle East conflict, which has not caused major supply disruptions. Brent crude, the international benchmark, rose as high as $76.03 before closing at $73.90 yesterday. West Texas Intermediate, the US benchmark, ended 0.4% higher at $70.10 a barrel.

The fear among traders is that an Israeli retaliation could target oil infrastructure in Iran, an OPEC member that exports about 1.7 million barrels of oil a day. An attack could also bring the region closer to a worst-case scenario for the oil market, in which OPEC output is compromised and Tehran closes the Strait of Hormuz, a crucial choke point for crude, sending prices spiraling into triple digits.

Ben Hoff, global head of commodity strategy at Société Générale, said: “It’s like a game of Jenga, where the question really becomes, once you get to the seventh or eighth block, which one is going to get pure and simple. being a little too much and it all falls apart on its own?”

What does this mean for the US? Harold Hamm, the founder of Continental Resources and a donor to Donald Trump’s election campaign, has warned that the US is “unusually vulnerable” to an oil shock in the Middle East, blaming the policies of the Joe Biden administration for leaving the US shale zone in “weakened state”.

But it’s not the 1970s anymore. Thanks to the shale revolution, the US is the largest producer of oil and gas, with production reaching record levels. A Middle East oil shock will not devastate the US economy in the same way it did then.

“The US is the most prepared of any developed (economy). . . to handle a significant disruption in the Middle East,” said Hunter Kornfeind, oil market analyst at Rapidan Energy Group.

That’s not to say higher crude prices from market fears or an actual global supply disruption won’t pinch consumers.

While the US became a net exporter of oil in 2020, it remains a net importer of crude that is often used in refineries, with imports totaling 6.48 million b/d last year, about a quarter of which came from OPEC and the Gulf , according to the Energy Information Administration. Higher oil prices on the global market will increase the price of refined products such as gasoline and diesel for American consumers.

The US has a “large cushion” of crude stockpiles to help buffer the effect of any price changes, analysts say. The country still has about 383 million barrels (about 50 percent of capacity) in its strategic oil reserve, which was created following the Arab oil embargo in the early 1970s, in addition to 413 million barrels in commercial stocks of crude oil. The US consumes about 20 million barrels of oil per day.

The White House began releasing oil from the SPR in 2021, before Moscow’s invasion of Ukraine, in an attempt to keep domestic gasoline prices low. It released an additional 180 million barrels of oil from reserves in 2022 after sanctions against Russia raised fears of supply disruptions.

Trump and his supporters, including Hamm, argue that the Biden administration has left the country exposed to an oil shock, with Trump promising to complete the SPR “immediately” if elected in November.

Analysts brushed off the concerns. “The SPR is smaller than it was before Ukraine. But at the same time, it still has enough to offset any kind of supply disruption at least for the immediate period,” Kornfeind said.

Absent a disruption in the Strait of Hormuz, there is also plenty of unused capacity from OPEC sitting on the sidelines. Since the end of 2022, the oil cartel has artificially cut production, totaling about 5.7 percent of global crude consumption, in an effort to boost prices during weak global demand. In a meeting yesterday, top OPEC+ ministers left their oil policy unchanged.

“The market remains bullish on the fundamentals for next year and does not believe oil stocks will be at risk despite the escalation,” said Amrita Sen, founder and managing director of Energy Aspects. “Prices may fall after initial rally.”

Perhaps the biggest consequences for the US of higher global crude prices are at the ballot box. Escalating action in the Middle East could send gas prices higher as Americans go to the polls next month to choose their next president.

Henning Gloystein, head of the energy, climate and resources practice at Eurasia Group, said: “If there is any major increase in the price of oil, it will be felt immediately at the pump, and that is what American voters care about more than anything else in terms of what concerns daily. pricing.”

A rise in gas prices in the coming weeks was a “bad situation” for Democratic candidate Kamala Harris’ election prospects, he added.

Power points

• TotalEnergies is warning it will cut UK investment and restructure North Sea operations if the government increases its one-off levy as planned.

• Chinese overseas investment is rising from record levels as the country’s clean energy sector looks to set up manufacturing operations overseas in the face of US and EU tariffs.

• Opinion: Alan Beattie explains why the US can’t impose its will on the global electric car trade.

Energy Source is written and edited by Jamie Smyth, Myles McCormick, Amanda Chu, Tom Wilson and Malcolm Moore, with support from the FT’s global reporting team. It reaches us at [email protected] and follow us on X at @FTEnergy. Keep up to date with previous editions of the newsletter Here.