Conflict in the Gaza Strip
Oct. 13, 2023
Weekly Highlight – 10.13.2023
There is concern that military clashes between Israel and Palestinian Islamist group Hamas could escalate into a broader conflict. While Israel produces very little crude and has a total refinery capacity of about 297,000 b/d, markets are worried the conflict could expand and disrupt wider Middle Eastern supply, worsening a deficit expected to last into the end of this year. At the time of writing, we have not seen notable disruption in traffic through the Suez Canal and the Hormuz Strait, nor increased war premium in these chokepoints. However, if a wider conflict were to impact transit activity in the Strait of Hormuz, we estimate potential for disruption in a region responsible for up to 30% of global oil supply.
We believe the biggest risk in an escalating conflict would occur if Iran were to become more heavily involved. This would likely result in stricter sanctions enforcement on the Iranian crude, mainly flowing to the Far East after rebranded as either Omani, Iraqi crude, Bitumen Blend or Malaysian Blend. Iran could find its crude production and export capabilities threatened if they were found to be more heavily involved in the Israel/Hamas war. Iran, which has begun boosting supply despite US sanctions, saw production hit 3.7 million b/d in September, its highest since October of 2018 (Platts).
Should there be noticeable disruption in Middle Eastern cargo flows, we believe Western suppliers may opt to step up their exports. This could potentially involve exports from Brazil, Caribbean and West Africa, but mainly from the US Gulf – something we are observing as these lines are written. In response to the current fear of a potential Middle Eastern crude supply disruption, we have observed a rush fixing in the Atlantic Basin for both East and Westbound cargoes. The VLCC TD22 USG>China rates gained over US $2.5 million during the week and assessed at US $10 million at the time of reporting. The strong pull from the East has also tightened the available VLCCs for the Westbound trades, pushing charterers to seek Aframaxes for USG>TA cargoes. The Aframax TD25 USG>UKC has increased 95 WS points throughout the week and is currently rated at WS 215. Oil price is another volatile factor under the current situation, depending on the disruption and/or OPEC+ policy. Simultaneously, Russian crude is expected to remain “untradeable” under the current price cap, incentivizing conventional Aframax owners to reposition their tonnages to the Carib-USG region. However, the premium to trade Russian barrels could find an increase in secondhand sale into the "Shadow Fleet", reducing the overall Aframax tonnage supply and further supporting tanker earnings.
Figure 1: Iran Crude & Condensate Balance Figure 2: DPP Ton Miles to Far East
Source: McQuilling Services, Kpler
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