This is the biggest oil disruption in history
By David Goldman, Matt Egan, CNN
(CNN) — A historic disruption to the world’s oil production sent crude prices smashing through the $100 barrier Monday for the first time in nearly four years, before prices settled just below $100.
The the war with Iran drags on, oil futures could have considerably more room to run even higher.
In fact, oil prices very nearly hit $120 a barrel overnight before reports surfaced that Western nations would discuss steps to alleviate high fuel prices. That eased a bit of tension in the marketplace.
US crude prices settled at $94.77 a barrel, up 4.3% Monday. Brent, the international benchmark, rose 6.8% to $98.96 a barrel.
The last time oil had traded above $100 was in the wake of Russia’s attack on Ukraine. Oil broke above $100 in March 2022 and stayed around there until July 19, 2022. It hadn’t touched triple digits since.
What’s going on?
The war with Iran has sent oil prices higher for two primary reasons: a near shutdown of the Strait of Hormuz and a slowdown in oil production in the Middle East.
The Strait of Hormuz is a narrow waterway through which 20% of the world’s oil travels via tankers. Iran has threatened to attack any tanker transiting the strait. That has led to a standstill in oil pickups and deliveries in the region.
The estimated 20% of disrupted supply is roughly twice as big as the record set during the Suez Crisis of 1956-1957, according to historical data from Rapidan Energy Group.
The war has also effectively wiped out the spare capacity, because Saudi Arabia and the United Arab Emirates have been cut off from global oil markets. Spare capacity measures how much more oil production could quickly be brought back online, if needed, and it typically serves as a shock absorber in energy markets.
“The result is a market with no meaningful cushion. There is no swing producer to step in,” wrote Bob McNally, Rapidan’s founder and president, in a note to clients.
Because oil isn’t moving, producers in the oil-rich region have run out of room to put their crude. They’ve been left with no choice but to slow down their output.
As oil prices have surged, so too have gasoline prices. US gas prices have risen about 50 cents in a week to $3.48 a gallon, higher than at any point in either of President Donald Trump’s terms.
How long could this last?
The good news: The world has plenty of oil. We were sitting on a supply glut before the war, which is why oil had been so cheap, trading for around $60 a barrel before the United States and Israel attacked Iran.
Oil traders don’t think $100 oil is here to stay. Looking forward to contracts for delivery in 2027 and 2028, oil futures are trading in the high $60s, noted Dan Pickering, founder and chief investment officer at Pickering Energy Partners.
The bad news: This war with Iran is lasting longer than most traders had initially expected. The historic spikes in oil prices reflect that early complacency is giving way to the harsh reality that the war isn’t going to be over in a matter of days.
“I would say that the move is a bit overdone in the very short term, but if between now and the end of March you don’t have an amelioration of traffic around the strait, we could go to $150 a barrel,” said Homayoun Falakshahi, lead crude research analyst at Kpler.
Meanwhile, governments are working to alleviate some of the pressure on prices in the market: The G7 nations’ finance ministers will meet Monday to discuss joint release of oil reserves. And the Trump administration continued to promote a plan to supply insurance to oil tankers passing through the strait, after maritime insurers said they would not cover ships in the region if they were attacked.
The White House also said it would work to secure naval escorts for ships, but a plan hasn’t emerged, and shipping companies have said they are hesitant to traverse the region while the conflict continues.
Meanwhile, absent a compelling solution to the strait’s closure, oil prices will continue to march higher.
“The higher the price goes, the more pressure on the Trump administration to do something to protect the strait,” said Pickering. “The longer it takes to re-open, the more upward pressure on price. A reinforcing cycle.”
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This story has been updated with additional content,
