A new oil reality starts to dawn
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Illustration: Rebecca Zisser/Axios
As the Iran war drags on, it's increasingly clear that there is likely no going back for the energy market.
Why it matters: Oil and gas prices will be higher for longer than investors expected, and the market dynamics are shifting — as countries and companies look for alternative sources of energy or oil and for new ways to move it around the world.
The big picture: Wall Street doesn't seem to care a ton that the biggest energy shock in decades is permanently altering the underpinnings of arguably the biggest and most important commodity market on the planet.
- Although there have been some signs this week that analysts are waking up to the new reality, stocks are still at record high levels.
- There are reasons that this makes more sense than it would at first seem, as we explain below.
Between the lines: The war is catalyzing all kinds of changes because players realize that they can no longer depend on free movement through the critical Strait of Hormuz and that prices will be higher for longer as a result.
- That gives everyone more incentives to drill, open up new pipelines, ink energy deals, etc.
Case in point: A sustained oil price of $100 a barrel could unlock up to 2 million more barrels per day of crude from South American countries, a recent analysis from Rystad found.
- "The Middle East conflict has done more than spike oil prices — it has exposed how dangerously concentrated global supply chains are around the Strait of Hormuz," the analysts wrote.
State of play: The United Arab Emirates said Tuesday that it is pulling out of OPEC, the Organization of the Petroleum Exporting Countries.
- The UAE's departure is the clearest sign yet of how the Iran conflict is permanently shifting dynamics in the market.
Follow the money: Shell just announced its largest deal in over a decade to acquire Canadian oil and gas producer Arc Resources.
- Gulf states are looking for new pipelines to get around the strait.
The intrigue: Given all this disruption, there has been an expectation that oil prices would be higher and stocks would sink — instead the market's been sanguine. Stocks are hitting new highs!
- Citi analysts explain why: Coming into the conflict, oil inventories were high and the release of reserves from the International Energy Agency's member states helped smooth out the shock.
What to watch: Wall Street analysts do seem to be coming to the realization that higher prices stemming from the conflict are going to be longer lasting.
- Citi raised its forecast this week. And Goldman Sachs did, too, predicting the average price of a barrel of Brent crude, the global benchmark, would average $90 a barrel in the fourth quarter, up from $80.
- The forecast is now nearly $30 higher than it was before the war started.
- Those numbers are their base case, which now assumes that the Strait of Hormuz reopens at the end of June. If the reopening is at end of July, they predict $100 oil. And in the worst-case scenario, the strait never fully gets back to normal, and oil remains elevated at $120.
