The military tension between Israel and Iran was the direct trigger when oil prices broke through $90/barrel last week. But the basis for this round of gains is broader — global supply shocks have fueled fears of a comeback in commodity-driven inflation. For example, Mexico's recent move to cut crude oil exports has exacerbated the tight global supply situation and prompted refiners in the US, the world's largest oil producer, to increase domestic crude oil consumption. US sanctions have left Russian goods stranded at sea, and Venezuelan supply may be the next target. Attacks on Red Sea oil tankers by the Houthis rebels have also delayed crude oil shipments. And despite market turbulence, OPEC and its allies continued to cut production.

All of this added up, and the extent of supply disruptions surprised traders. There was a sharp rise in oil prices before the summer driving season in the US, which may raise the global benchmark Brent crude oil to $100 per barrel for the first time in nearly two years. This has heightened concerns about inflation, which are overshadowing US President Joe Biden's chances of re-election and complicating the interest rate cut considerations of major central banks.

Amrita Sen, founder and head of research at Energy Aspect Co., Ltd., said in an interview that the greater driving force for oil is currently the supply side. “You've seen quite a bit of weak supply, but global demand is generally healthy,” Sen said.

Shortage of supply

Production cuts by OPEC and its partners, combined with the unexpected elasticity of fuel demand, pushed the price of Brent crude oil to nearly $90 per barrel, the highest level since this year. Production cuts in countries in other regions and ongoing conflicts in the Middle East are also supporting crude oil futures prices.

OPEC+ production cuts continue

OPEC+ remains unchanged in its production reduction plan for the first half of this year. According to an official statement, a panel of key members led by Saudi Arabia recommended no policy changes at an online review meeting last Wednesday; this means production cuts of around 2 million b/day will remain unchanged until the end of June, which will keep the global market tense and may push up oil prices. The statement said the Joint Ministerial Monitoring Committee (JMMC) “will continue to closely evaluate market conditions,” and OPEC+ member states confirmed “ready to take additional measures at any time.”

Despite the fact that some major member states — Iraq and Kazakhstan in particular — did not implement the production reduction agreements they reached, OPEC's production cuts have successfully tightened the market. According to the statement, the commissioners were once again urged to abide by their promises at the committee meeting last Wednesday. Iraq and Kazakhstan have promised further production cuts to make up for excess production, and they are required to submit detailed production reduction plans by the end of April. In terms of delivery, the two countries have mixed records. Iraq is often unhappy with OPEC+ production restrictions as it seeks revenue to rebuild its shattered economy.

By maintaining restrictions, OPEC+ looks like it will ensure that the global oil market maintains a slight deficit in the second quarter, according to data from the International Energy Agency (IEA). J.P. Morgan warned that this shortage could push oil prices to $100 per barrel.

Russia, which is co-leading OPEC+ with Saudi Arabia, has also mixed measures to cut production. Russia has been slow to implement the crude oil production cuts promised a year ago, but it is unclear how it has cut the scale of exports agreed to this year. Although shipments of fuels such as diesel have declined, this may be related to Ukrainian drone attacks on Russian refineries.

Oil production in Mexico, the US, Qatar and Iraq fell by more than 1 million b/d in March, according to tanker tracking data. Meanwhile, Iraq has promised to limit production to make up for its previous failure to abide by its promises to OPEC+ and its allies.

According to data from maritime news company Kpler, OPEC member UAE reduced shipments of medium-acid oil Upper Zakum by 41% in March compared to last year's average, which further exacerbated supply constraints. Traders say the UAE's state-owned oil company is shifting more crude oil supplies to its own refineries. Although production cuts were to be expected, and the country's Abu Dhabi National Oil Co. (Abu Dhabi National Oil Co.) is providing buyers with another crude oil as an alternative, the decline in exports from the Upper Zakoum region has boosted prices in the region against the backdrop of OPEC+ production cuts.

In addition to OPEC+, other oil producers are also at risk of supply shortages

Last month, oil shipments from Mexico, America's main crude supplier, fell 35% to their lowest level since 2019, as Mexican President Andres Manuel Lopez Obrador (Andres Manuel Lopez Obrador) tried to deliver on promises to free the country from expensive fuel imports. According to media reports last week, exports of the country's so-called sulfur-containing crude oil (heavy, dense crude oil designed by many refineries) will now shrink further as state-owned oil company Pemex (Pemex) cancels some supply contracts with foreign refineries.

The decision disrupted the global oil market. Mars Blend is a medium density sulfur-containing crude oil produced on the US Gulf Coast. Recently, US WTI crude oil, which is less expensive, has had a premium for many years. The trading price of Mars Blend crude oil is usually lower than WTI crude oil. Brent crude hit 90 US dollars/barrel on Thursday, the highest level since October last year, and continued its gains last Friday. J.P. Morgan has said that oil prices may reach 100 US dollars/barrel in August or September.

The difference between the price of Canadian Cold Lake crude oil and WTI crude oil on the Gulf Coast is close to the lowest in a year. Key indicators of middle-acid crude oil in the Middle East, such as the crude oil contract between Oman and Dubai, are also rising.

There were a series of supply disruptions, large and small, before Mexico took action. Under normal circumstances, U.S. crude oil production and stocks will increase in January, but this year's deep freeze has eroded these production and inventories, leaving stocks below the seasonal average until the end of March.

Meanwhile, the European crude oil market was under increasing pressure from the Houthis to launch an attack in the Red Sea. Millions of barrels of crude oil bypassed Africa, causing some supplies to be delayed for weeks. The interruption of an important oil pipeline in the North Sea, unrest in Libya, and damage to a pipeline in South Sudan have also driven up oil prices, while US sanctions have prevented Russia from using tankers that transport oil to buyers, including India.

Supply constraints are likely to get worse in the coming weeks. As Venezuelan President Nicolas Maduro (Nicolas Maduro) has shown no sign of commitment to abide by American principles, the Biden administration may re-impose sanctions this month.

Samantha Hartke, an analyst at analysis firm Sparta Commodities, said that the heavy, highly polluting oil market “has been in a bearish state in the range for some time, but tight supply in the acid market and the outlook for the summer driving season in the US indicate that the market is turning around.”

This is in stark contrast to a few months ago, when oil prices fell to a multi-month low due to a rise in US production and an increase in Russian seaborne crude exports, even though sanctions have been extended. The US Energy Information Administration (EIA) previously predicted that global oil inventories would remain unchanged this quarter, and now predicts that daily inventories will be reduced by 900,000 barrels, which is equivalent to Oman's production.

Strong demand

At a time when supply is tight, demand is rising. American refiners are preparing to increase fuel production during the summer, when millions of Americans will drive on the road, and gasoline consumption will peak. Gasoline stocks on the heavily populated east coast of the United States are being tightened, and manufacturing activity in the US and China is also showing signs of increased fuel usage. In Asia, refining margins are about 50% higher than the 5-year seasonal average, indicating healthy demand.

Last week, rising crude oil prices disrupted the Biden administration's plans to replenish America's emergency oil reserves. After the outbreak of the Russian-Ukrainian war, the scale of the decline in US strategic oil reserves reached a historic level, reaching its lowest level in 40 years. As food and energy prices remain high, this is also a political risk for Biden. The rise in oil prices may push retail gasoline to the key psychological price of $4. Currently, the average daily price of retail gasoline is close to $3.60/gallon. This has raised concerns that commodities will reverse the recent slowdown in consumer price increases.

Oil prices dragged down US inflation at the end of last year, and now they are driving up US inflation. The March Consumer Price Index (CPI), which will be released on Wednesday, may prove this once again, as overall CPI is expected to accelerate year-on-year growth, while core CPI excluding food and energy is expected to decline. Bloomberg's main commodities index has reached its highest level since November last year.

Vikas Dwivedi, a global oil and gas strategist at Macquarie Group, said that surging crude oil prices may eventually force OPEC+ to cut back some production cuts. J.P. Morgan once said that oil prices significantly above 90 US dollars may cause global demand to collapse, which will eventually lead to a drop in oil prices. But so far, there are no signs that this is happening.

Bob McNally, founder of consulting firm Rapidan Energy Group and former White House consultant, said in an interview: “There is no doubt that this is a market with solid fundamentals. I think the price of $100 per barrel of oil is completely real—it just requires a little more risk pricing based on real geopolitical risk.”