Last week we have seen Brent inching north of $85 levels post the increase in escalations in Iran conflict. The latest escalation stems from Iran’s attempt to redefine the terms under which commercial vessels transit the Strait. Tehran appears intent on establishing authority over navigation itself through mandatory transit protocols and transit fees. Oman responded by opening a US-backed corridor along its coast, enabling stranded vessels to leave. When several ships attempted to transit without complying with Iran’s requirements, Iran struck commercial vessels off the Omani coast to reinforce its position. The US responded by reinstating sanctions on Iranian oil exports, resuming a blockade of Iranian ports & daily aerial attacks on Iran in the night. We believe crude oil and refined product net exports including the effect of rerouting stood at 50% and 20% of pre-war levels during the first week of the new phase. Aggregate total oil net exports at 45% of pre-war levels (including rerouting) so far in this new phase compare with averages of 31% in the initial escalation phase and 35% in the negotiation phase, indicating that there has been some progress in loosening Iran's hold over the strait. In absolute terms, middle east export numbers stood at 8.4 mb/d for crude oil and 1.0 mb/d for refined products. We see larger issue with refined product's supply than crude itself. Right now the market is short about 2.5 mbd of Middle East product supply. Add to that the Russian refinery issues where refinery runs have slipped to 3.3 mbd from 3.8 mbd last week, and are 2.0 mbd below last year’s levels, further tightening an already fragile global product balance. The strain is most visible in diesel: exports are now close to zero, down nearly 800 kbd from a year ago. Last week we read the bipartisan Russia sanctions bill which if gets passed, might further adversely impact the refined product balance. To us the shock is increasingly becoming a refining story rather than simply a crude supply story. On the larger picture, do we believe the current conflict is a forever war? We don't think so. We continue to believe both sides are negotiating rather than seeking a prolonged confrontation. Iran’s main objective is no longer to restore the status quo ante. Control over Hormuz offers both strategic deterrence and a recurring source of economic leverage. But Tehran risks overplaying its hand: If it continues to squeeze, it will lose strategic leverage — not immediately, but over the next five years or so as its neighbours build more bypass routes. By striking oil tankers off the coast of Oman, it has convinced every one of the Persian Gulf states, as well as oil importers including deep-pocketed nations such as China and Japan, that the only way to guarantee future oil flows is to invest billions of dollars in new pipeline capacity. We continue to believe in the range of 75-85 for Brent in REMCY26 & Brent falling gradually to 50 levels by H1CY27 and possibly sub 50 too in H2CY27 as alternate supply routes come online & global demand remains weak.
