Brent January Futs Hit New Highs As Oil Market Braces For Post-Midterm Gulf Escalation

Brent crude futures tagged $118 a barrel early Friday, touching a six-month high as more attacks on commercial vessels in the Strait of Hormuz and on Saudi energy assets raised concerns about a potential flare-up in the Gulf conflict after next week’s US midterm elections.

President Trump continues to receive briefings on military options against Iran, according to a new Wall Street Journal report. Trump has signaled that a “brief Epic Fury” could resume after Tuesday’s midterm elections.

A letter sent this week from Vice President JD Vance to Iran’s top leadership has not yet received a response. Tehran has maintained that any peace talks require the Trump administration to lift the blockade on Iranian oil and unfreeze Iranian funds.

“What is the price of oil? Eight months into the war with Iran, what should be a straightforward question has become surprisingly hard to answer,” JPMorgan energy expert Natasha Kaneva wrote in a note. Kaneva’s current model puts Brent around $94 a barrel, well below $118.

Brent crude futures for January delivery are making new highs this morning as buying continues to move up the curve.

“The world has far less protection against another supply interruption,” Bloomberg reporter Rebecca Feng said.

Feng noted, “Global on-land oil inventories that could be readily drawn and used were near their lowest since at least 2016, according to the latest figures from the IEA.” While data from ship tracker Kpler show Gulf export volumes exceeding prewar levels of 23.3 million barrels a day, total supply to the market, including deliveries to domestic refineries, remains below last year’s levels, Morgan Stanley analysts warned.

UBS energy specialist Dominic Ellis added more color on Brent crude:

Brent touched a 6-month high on Friday, passing through $117/bbl, on news of fresh attacks on vessels in the Strait of Hormuz and Saudi energy assets and the absence of progress from recent attempts to engage diplomatically with Iran. US VP Vance’s letter to Iranian officials has yet to elicit a response, but Iran’s messaging has been consistent and clear: they are willing to engage only when the US commits to lift the blockade on Iranian oil and to unfreeze Iranian funds. The Wall Street Journal reported [paywall] on Thursday that President Trump continues to take briefings on military options for Iran, and has signaled that attacks may restart after the US midterms next Tuesday.

In another sign of growing concern about the security situation in the Middle East, senior executives at Exxon and Chevron have pulled out of the ADIPEC conference due to take place in Abu Dhabi next week. I continue to believe that US midterms are not likely to be a catalyst for renewed Middle East diplomacy by the US, whatever the outcome. 

While spot prices and the front end of the forward curve seem to be pricing in a higher probability of escalation and disruption to energy production and exports, I continue to believe the market is not realistically pricing in the medium or longer-term impact of the Middle East conflict, and that prices could spike higher unless there is more substantive evidence of diplomatic progress than has thus far been the case.

Earlier this week, Jefferies hosted Atlantic Council Middle East specialist and former US intelligence official Jonathan Panikoff for a discussion with analysts Aniket Shah and Lloyd Byrne on what comes next in the Gulf after the midterms. With Brent at a six-month high and diplomacy stalled, the big question that now remains is: renewed talks or another round of strikes? Read the note