Energy markets face “calm before the storm” as supply risks build

The US-Iran standoff still has the capacity to push Brent crude sharply higher if diplomacy fails to reopen the Strait of Hormuz, according to Commonwealth Bank’s Head of Commodities and Sustainable Economics, Vivek Dhar.

Speaking on the latest CommBank View: Economics and Markets podcast, Dhar said “This is almost a calm before the storm. The market has calmed down very much because of expectations of [a] deal.”

Brent crude oil, the global benchmark, was around $70 a barrel before the conflict, but surged to nearly $120 and is now in the mid-US$90s. 

Recent stability in oil and refined product prices has also been helped by drawdowns on oil stockpiles, which have offset disruptions to physical supply.

But those buffers are finite, Dhar said, adding that global inventories could reach “operational stress limits” by mid-June to mid-July. If those buffers are exhausted before supply normalises, markets may need to force consumption lower through higher prices – which effectively shuts some buyers out of the market, he said.

Two paths for oil

Dhar outlined two sharply different scenarios for oil prices, depending on whether supply routes normalise.

“If we do see a deal come through… we could see… about US$80 a barrel by the end of the year,” he said, provided shipping traffic through the Strait of Hormuz returns to “about 70 to 80% of pre-war levels.”

If those stockpiles begin to run low before the Strait of Hormuz reopens, Dhar said crude may need to rise enough to force weaker buyers out of the market, especially in emerging Asian economies. 

“We could see prices of about US$150 a barrel for Brent,” he said. “That’s why these next few weeks are very, very crucial in terms of the two fates for oil.”

The risk is timing. 

Dhar said inventory buffers could reach worrying levels between mid-June and mid-July, especially for refined fuels. “It is the middle distillates that we're worried about,” he said. “So jet fuel and diesel are the ones that have caught our attention.”

Demand destruction risk grows

At higher prices, Dhar said consumers and businesses move from choosing to use less fuel to being unable to afford it – otherwise known as demand destruction – which has broader economic consequences.

“When you get to uncontrolled demand destruction… we could see a lot more slowdown in terms of economic output.”

Emerging economies are particularly exposed, especially where energy affordability becomes a binding constraint.

“There are countries where prices have to get high enough where they can’t bid for oil… and that is where emerging Asia is very vulnerable.”

Diesel is a key pressure point because of its role across transport, industry and agriculture.

“If you don’t have diesel, economic output really does get damaged, and it’s quite significant.”

Transition accelerates, unevenly

The shock is reinforcing longer-term shifts away from oil, particularly in transport.

“We really see the case for particularly the transport sector to move away from oil and refined products,” Dhar said.

He said electrification remains compelling for heavy transport in Australia.

“Seventy per cent of heavy haul routes are about 300 kilometres or less… this is a sector that we see is very ripe for that electrification argument.”

At the same time, near-term security concerns are pushing some markets back toward coal.

“We are certainly seeing people trying to go from gas to coal just for that protection… particularly playing out in Asia,” Dhar said.

Read Vivek Dhar’s full research note: Oil market update : What if the Strait of Hormuz doesn’t re-open soon?