On Thursday, the price of Brent crude jumped to its highest in four years as fears of an escalation in the military conflict between the United States and Iran worsened. The conflict has disrupted shipping through the Strait of Hormuz where 20% of global oil supplies transit as they head to international markets.
Brent futures rose by 3.6% to reach $122.3 a barrel, the highest price it has reached since March 2022. Brent crude for delivery in July was priced at $112.4, reflecting some hope that the shipping disruptions will have eased by then.
West Texas Intermediate oil was selling at $103 per barrel early on Thursday, notching a 90% increase from a year ago. Meanwhile, Brent has more than doubled in price within that same timeframe. These spikes have stoked fears of surging inflation and possible global economic growth slowdowns or even recession.
Reports indicate Trump is due to be briefed about possible strikes on Iran as a way to compel the Gulf country to return to talks. Iran insisted that discussions about its nuclear program should wait until active hostilities come to an end while the U.S. wants that issue to be handled in any talks resulting in an end to attacks on Iran. That impasse has dimmed chances of any quick resolution.
Trump is said to have had a meeting with U.S. oil executives on how to mitigate the likely effects of the U.S. blockading Iran ports for several months. This suggests that the possibility of the conflict stretching over several more months is strong.
Meanwhile, the members of OPEC+ are slated to meet over the weekend to agree on how much to ramp up production. Any quota increases are likely to be small as the oil producers don’t want oil prices to drop too much. This meeting will take place just after the UAE effectively leaves the cartel on May 1.
Any increases by the UAE as it makes its own oil production decisions have a limited chance of influencing crude prices this year given that transit through Hormuz is still paralyzed and production in several Gulf countries is still hamstrung by the ongoing conflict.
Many analysts posit that prices could be tamed with time if gas prices remain so elevated that many consumers opt to forego buying fuel due to affordability issues. Demand destruction therefore offers a near-term valve to ease supply shortages.
For companies like Berkshire Hathaway Inc. (NYSE: BRK.A) (NYSE: BRK.B) with vested interests in the energy sector, the situation in the Gulf is something they will track closely given the outsized impact the war is having on energy markets and the global economy.
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