Will oil prices rise to $200 due to the crisis in the Middle East?

Alexey Gromov, Principal Director on Energy studies at the Institute for Energy and Finance, gave a wide-ranging interview to the online portal “URA.RU” about the prospects for growth in global oil prices amid the Middle East crisis.

— Analysts note that oil exports through the Strait of Hormuz have partially recovered, according to some data — by three‑quarters. Meanwhile, the Brent price remains at $100 per barrel. Why hasn’t it fallen with the partial recovery of flows, as was the case in the summer?

— Indeed, if we rely on the data we receive from leading investment banks and international companies that track tanker movements, they all note that tanker traffic is recovering. Before the conflict began, an average of 16 million barrels of crude oil per day passed through the strait. Tanker tracking shows that volumes have now recovered to 12-13 million barrels, i.e., about three‑quarters of the previous level.

However, the ban on tankers passing through the Strait of Hormuz without Iran’s approval remains in force, as does the blockade of Iranian raw material exports by the United States of America. And all oil traffic is carried out by carriers at their own risk.

— What is causing such a sharp rise in prices? By increased risks?

— Yes, it’s a risk premium. Furthermore, the transportation scheme itself has changed. Previously, a tanker in the Persian Gulf would load oil and then calmly deliver it to its customers in Asia. Now, a small tanker—one that wouldn’t be a big loss if it were torpedoed or damaged by a drone or missile—needs to first load oil in the Gulf, then, at its own risk, navigate the Strait of Hormuz, and then transfer the raw material to a larger tanker, which will deliver it to the customers. This also increases the cost of transportation.

At the same time, today’s clients are refusing to purchase oil on free on board (FOB) terms — when it is bought at the shipping port — and are opting for the cost, insurance and freight (CIF) scheme, under which all transportation risks fall on the exporter.

As a result, the transportation component — $30–$35, and in some cases even $40 per barrel — is included in the final price of the oil, which the client then buys at the final destination.

Thus, the problem of high freight costs and the risk of military escalation contribute to persistently high oil prices, even in a situation where “gray” traffic through the Strait of Hormuz has approached pre‑war levels.

— Russell Hardy, head of the largest oil trader Vitol, warned that if exports through the Strait of Hormuz are disrupted again, oil prices could rise to $200 per barrel. How likely do you think such a scenario is?

— I belong to the category of experts who are skeptical about any kind of alarmist forecasts. The main message that Mr. Hardy outlined in his speech is that if traffic through the Strait of Hormuz drops back to near‑zero levels, prices will rise sharply, because the safety cushion made up of commercial and strategic oil reserves, which were accumulated before the conflict in the Middle East began and have been actively used up over the past seven months, will run out. However, we saw that throughout the crisis, even during its most acute phase — in May and early June — prices did not rise above 110–115 dollars per barrel.

This is due to the fact that when there is a threat of a physical shortage of oil on the market, additional factors come into play, which are often difficult to calculate. Russell Hardy says that today the level of stocks in buying countries has dropped to critically low levels, but this is only one side of the coin.

On the other hand, demand may also adjust downward if there is a threat of a physical shortage of oil and an uncontrolled rise in its price.