Oil weekly forecast: the strike is off the table, the strait is not

What is already in the price

On Thursday, October 8, reports that the White House wanted strike options against Iran sent Brent up as much as 5%, to nearly $106. Later the same day Trump said the US would not attack Iran before the November 3 midterms, and Brent settled at $104.28, up about 4%. It is tempting to read the day as a strike scare that came and went. The more important numbers did not move back.

Picture the oil supply as a motorway with several lanes. The Iranian lane has been closed since the US Navy reinstated its blockade in July; tanker trackers recorded no Iranian crude loadings at all in September. That lane was priced long ago. What changed this month is that the open lanes are being hit: Saudi, Emirati, Kuwaiti and Iraqi cargoes that still pass through the Strait of Hormuz. Attacks on tankers there reached twelve in the week to October 5, the most since the war began, and crude crossing the strait fell 27% in a week to about 10.1 million barrels a day.

That does not mean the oil is missing. Saudi Arabia is sending more crude west through its East-West pipeline to the Red Sea, and cargoes are moving ship to ship in the Gulf of Oman. Counting those routes, Kpler put Middle East crude exports at 18.5 million barrels a day in the week to October 1, slightly above the pre-war average. What the attacks have raised so far is the cost and risk of delivery: longer routes, dearer insurance, less room for error. A shortage only starts if the bypass routes fill up or come under attack too. The strike headline came and went in a day. The attacks on the open lanes did not, but so far they have changed the route, not the volume.

So the question for this week is not whether the US strikes. It is which of two things happens first: talks that reopen the strait, or attacks that close more of it. Iran is reviewing Washington's response to its own seven-day plan to reopen the strait, and its foreign minister said a reply would come within days. That reply is now the event most likely to reprice oil.

One more supply shock sits outside the Middle East. Hurricane Isaias has shut in about 1.28 million barrels a day of US Gulf of Mexico output, nearly two-thirds of it, as a precaution before landfall. On the other side, IEA members agreed on October 7 to speed up the release of about 100 million barrels of emergency stocks already pledged in March: earlier barrels, not extra ones. How fast the Gulf restarts, and how fast those stocks arrive, will move prices around the Middle East story.