Oil prices approach Iran-war highs as soaring tanker rates trigger a second energy squeeze

By Myra P. Saefong and Isabel Wang

Rising costs of moving crude supercharge the surge in global oil prices

The U.S. State Department has ordered the departure of some non-essential personnel from the U.S. Embassy in Saudi Arabia.

Wall Street has grown more worried about the Middle East scenario everyone fears: a full-scale regional conflict that could further choke off global energy supplies.

The major concern is that an escalation of the Iran war - now almost eight months old - could unleash a fresh wave of turmoil across financial markets.

After all, global oil prices on Thursday were approaching their highest levels since the U.S. and Israel started the Iran war in late February. The U.S. State Department's decision to order non-emergency government personnel to leave Saudi Arabia following attacks on regional oil fields and airports, coupled with further drone attacks by Iran-backed Houthis, are fueling fears that the worst of this conflict is yet to come.

"Diplomatic evacuations of non-essential staff and accompanied family members are fairly routine and driven more by security conditions than political ones," said Matt McManus, senior fellow at National Center for Energy Analytics, a nonpartisan energy think tank. "Nevertheless, it also sends a signal that on-the-ground infrastructure is at risk, and given Saudi Arabia's large oil production, this of course has broader market implications."

The fact that the U.S. is pulling American families from Saudi Arabia "certainly sends a different signal than anything we've seen since the outset of the war," said William Stern, founder and CEO of small-business lender Cardiff. Saudi Arabia was supposed to be the "backstop if and when Hormuz got ugly, and now we're genuinely worried about our Plan B."

Saudi Arabia was supposed to be the "backstop if and when Hormuz got ugly, and now we're genuinely worried about our Plan B."William Stern, Cardiff

Prices for oil have climbed since Reuters reported Wednesday that the State Department's evacuation orders will include some staff and their family members from certain U.S. embassies in the Persian Gulf region. But in comments to MarketWatch, a State Department spokesperson emphasized that the ordered departures are only for non-emergency U.S. government employees and their families in Saudi Arabia.

The Iranian-supported Houthis have increasingly engaged in hostilities against Saudi Arabia, they said. These hostilities have the potential to escalate rapidly, including beyond the immediate area - and the safety and security of department personnel and their families remain the highest priority.

Still, prices for U.S. benchmark West Texas Intermediate crude (CL.1) (CLZ26) climbed 2.4% to settle at $99.47 a barrel Thursday, 12% below their year-to-date closing high of $112.95 on April 7, according to Dow Jones Market Data. Global benchmark Brent crude's December contract (BRNZ26) (BRN00) ended up 4% at $113.17 a barrel, the highest settlement price since May 4, and was just 4.4% below the year's closing high of $118.35 in late March.

"When you look at Brent crude today, traders aren't exhausted about the ongoing conflict," said Stern, whose clients include trucking, delivery and construction companies dealing with high fuel prices. "They're just pricing a commodity at a price that reflects that the war will continue after the U.S. midterms."

President Donald Trump has repeatedly claimed that oil prices will fall immediately after the midterm elections take place in two weeks. But now that seems increasingly unlikely given the recent escalations.

Soaring shipping costs

What's more, the ongoing price shock in energy markets isn't just about headline benchmark prices as the price of crude oil is only part of what determines the cost to supply the world with fuel. Now, a second squeeze is emerging as soaring shipping costs begin to reshape global crude flows.

"For most of the past decade, freight was often little more than a supporting character in the crude-oil story, important to physical traders and refiners but rarely influential enough to dominate the broader market narrative," said Stephen Innes, managing partner at SPI Asset Management, in his latest Substack newsletter, The Dark Side of the Boom.

Now that "comfortable arrangement has been turned on its head by the Middle East conflict, where the cost of transportation is becoming almost as important as the price of the commodity being transported," he said.

Freight costs have soared in recent weeks, making it far more expensive to move crude and oil products around the world, according to data compiled by the International Energy Agency. In September, tanker rates surged to historic highs, and by mid-October, the cost of shipping crude from the Middle East Gulf to Asia on a large tanker had climbed to over $37 per barrel, more than five times its level before the war began.

"We are indeed looking at the beginning of a longer, structural change in how global oil gets distributed," McManus at National Center for Energy Analytics told MarketWatch on Thursday.

In other words, global energy flows are shifting. Iraq, the United Arab Emirates and Saudi Arabia are expanding routes and storage outside the Gulf region, while record crude production in the U.S., Canada, Brazil and Guyana is also increasingly shifting the center of global energy toward the Western Hemisphere, he added.

-Myra P. Saefong -Isabel Wang

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