Drone Strikes in Hormuz Strait: How Are Oil Prices Affected?

The resurgence of geopolitical risks has led to an increase in oil prices, with ICE Brent touching $74 per barrel again. The physical oil markets, however, feel extremely weak, despite the potential for temporary relief due to millions of barrels of stranded Gulf crude seeking its way out of the intermittent war zone. Saudi Aramco has slashed its official selling prices for Asian-bound cargoes in August by a whopping $11 per barrel, almost double the expected cut. This brings its flagship Arab Light $1.50 per barrel below Oman/Dubai, marking the first time since 2020 that Saudi barrels in Asia trade at discounts to regional benchmarks. Chinese demand for Saudi barrels is yet to recover after nominations for June collapsed to just 14 million barrels (470,000 b/d), the lowest reading on record, whilst flows to the United States have dried up completely. Faced with plunging European demand, Saudi Aramco dropped its formula prices by an even more formidable $15 per barrel, marking the largest monthly OSP reduction for both Asia and Europe since at least 2000. Saudi Arabia is taking its time to bring back all its idled production capacity – even though Aramco restarted loadings in the Gulf port of Ras Tanura, flows are relatively low around 1 million b/d in July to date, well below the pre-war rate of 6 million b/d. The market is also seeing other significant moves, with BP agreeing to sell its non-operated stakes in 10 licenses associated with Canada's offshore Bay du Nord project to Norwegian state oil firm Equinor, without disclosing the terms of the deal. US oil major Chevron signed a heads of agreement with Iraq's upstream giant Basrah Oil Co. to study two alternative crude export pipelines, Basrah-Ceyhan and Basrah-Baniyas, that would allow Iraqi production to bypass the Strait of Hormuz. Italy's national oil company ENI is buying a 25% stake in the Chilean lithium project developed by US startup Energy Exploration Technologies for $225 million, marking another oil major entry into lithium. London-based energy major Shell has signed a deal to sell its 50% stake in the Na Kika oil platform in the US Gulf of Mexico to a consortium of offshore specialists, Talos Energy and Ridgewood Energy, for a consideration of $1.7 billion. As the situation in the Hormuz Strait continues to unfold, the impact on oil prices and the global energy market remains a key focus for investors and analysts alike. The drone strikes on ships in the Strait of Hormuz have suddenly rediscovered the geopolitical risk premium, and the oil market is likely to remain volatile in the coming weeks and months.