Trump’s remarks on the Iran war cast a shadow over the oil market: More than 600 million barrels of oil supply face risks

U.S. President Trump has taken a hardline stance on the Iran war issue, driving a sharp surge in oil prices on Thursday. Traders are preparing for a more prolonged conflict, which will worsen already severe global energy supply disruptions.

The oil market had originally hoped Trump would lay out a clear troop-withdrawal strategy in his nationwide address late Wednesday. However, Trump said the war would last for several weeks, and vowed to strike Iran “extremely forcefully.”

“With the conflict expected to last at least until late April, the outlook for crude oil supply is becoming increasingly grim.” Ryan McKay, a senior commodities strategist at TD Securities, said in a report to clients on Thursday.

McKay noted that by the end of this month, the world will lose nearly 1 billion barrels of oil, including 600 million barrels of crude oil and about 350 million barrels of refined products (such as jet fuel, diesel, and gasoline). For every additional month the war drags on, it will cause an additional total supply loss of 450 million barrels.

Rapidan Energy predicts that if factors such as rerouting via pipelines, the release of emergency reserves, and inventory drawdowns are included, by the end of June the global net supply loss of crude oil and refined products will total 630 million barrels.

After Trump’s speech, U.S. crude oil prices jumped more than 10%, rising to above $110 a barrel. International benchmark Brent crude jumped more than 6%, breaking above $107 a barrel.

Independent oil analyst Tom Kloza said that right now in Houston, U.S. spot crude oil buyers are willing to pay nearly $120 per barrel, about $5.50 higher than the May futures contract.

“This speech is a disaster.” John Kilduff, founding partner of Again Capital, told CNBC. The market is rapidly digesting the effects of a prolonged war and the closure of the Strait of Hormuz.

The United States has no plan to reopen the Strait of Hormuz

In his speech, Trump did not propose any plan to reopen the Strait of Hormuz. This crucial sea lane has been effectively blockaded due to Iran’s attacks on oil tankers. The strait links the Persian Gulf with global markets, and before the war about 20% of the world’s oil supply was transported through it.

“The United States imports almost no oil through the Strait of Hormuz, and it won’t in the future. We don’t need it. We didn’t need it before, and we don’t need it now.” Trump said in the speech.

“Those countries that get oil through the Strait of Hormuz must be responsible for maintaining the passage themselves,” Trump said. “They must control it and protect it. They are fully capable of doing that. We will help, but they should proactively protect the oil they are extremely dependent on.”

Trump threatened to bomb Iran’s power plants and “send the country back to the Stone Age.” He also advised countries affected by the strait’s closure to buy oil from the United States.

“I can’t believe the U.S. military didn’t have the ability from Day One to start destroying Iran’s blockade of the Strait of Hormuz.” Bob McNally, president of Rapidan Energy, said. “It’s like you can’t imagine a parachutist jumping out of a plane without a parachute.”

Global fuel shortages

Rystad Energy analyst Matthew Bernstein said that due to lower refinery operating rates, pre-war supply overhang, and the release of emergency oil reserves by more than 30 countries at the International Energy Agency (IEA), oil prices have not yet risen to higher levels.

Bernstein said the market is starting to digest the long-term impacts of the war.

“In the future, the market will not be able to return to the pre-war state.” He said. “Even if the war ends, new demand for strategic reserves, rising insurance and freight costs related to the Strait of Hormuz, and a broader geopolitical risk premium in the market will all support oil prices.”

TD Securities’ McKay said that because the strait is still closed, oil inventories will begin to come under pressure. Floating inventories on tankers will be drawn down quickly, and land-based inventories could fall to multi-year lows as early as August.

“As market inventory buffers weaken, supply tightness showing up in Asia will start to spread globally.” The strategist said. Crude oil and refined product prices will face “increasing upward pressure over the coming weeks and months,” until high oil prices begin to suppress demand.

Shell CEO Wael Sawan warned in Houston last week that global fuel shortages will spread—first to aviation fuel, then diesel, and finally gasoline.

“This is a domino effect.” Sawan said at the CERAWeek energy conference hosted by S&P Global on March 24. “We see South Asia hit first. As we move into April, the impact will spread to Southeast Asia and Northeast Asia, and then broaden further to Europe.”

Gasoline and diesel prices

Natasha Kaneva, head of global commodities research at JPMorgan, said in her client report on March 26 that, thanks to strong domestic production, the United States is largely insulated from shortages. But she pointed out that the U.S. West Coast (especially California), because it relies on imports, could face supply disruptions before May.

Patrick De Haan, oil analyst at GasBuddy, said on social media that at the current pace, U.S. retail gasoline prices could jump to $4.25 to $4.45 per gallon over the next two weeks. Diesel prices could rise to $5.80 to $6.05 per gallon.

De Haan said that record-high oil prices may be just around the corner. In June 2022, after the Russia-Ukraine conflict shook the global energy market, U.S. gas station prices had touched a historical high of $5.02 per gallon.

Kloza said that rising diesel prices are the most serious problem right now. “This will trigger significant inflation in the second quarter,” he said.

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