(WO) — Brent crude could again test $120/bbl as Middle East supply disruptions, falling inventories and widespread refinery constraints erode the buffers that previously helped contain oil prices, according to analysts at PVM Oil Associates, part of TP ICAP.
John Evans, analyst at PVM, said the prospect of $120 Brent has become a “live” consideration again as the workarounds that softened earlier disruptions to Strait of Hormuz traffic begin to lose effectiveness.
When Hormuz flows were initially disrupted, alternative shipping routes and the coordinated release of strategic petroleum reserves helped prevent the severe price spike some market participants had anticipated. Evans said those options are now becoming more limited as geopolitical disruptions spread to other parts of the oil supply chain.
Saudi Arabia’s East-West pipeline had provided a critical alternative route, allowing the kingdom to move crude to Yanbu on the Red Sea and bypass Hormuz. However, continued Houthi attacks in the region have now forced Saudi Arabia to temporarily shut the pipeline, while fighting has also threatened shipping through the Bab al-Mandab Strait.
Tamas Varga, analyst at PVM, said the pipeline disruption comes as hopes for a diplomatic breakthrough over Hormuz have faded following the postponement of planned talks between Gulf nations and Iran.
“In the absence of any breakthrough, the downside is limited, and oil stocks, which the IEA now expects to fall faster than previously thought, will not be replenished any time soon,” Varga said.
Refining constraints are adding another layer of pressure. Evans pointed to disruptions to Russian refining capacity, high utilization rates in the U.S. and India, and constrained refining activity around the Persian Gulf. The result has been a tightening market for finished fuels, particularly diesel, while refiners compete for available crude supplies.
Emergency inventories may also provide less protection than during previous disruptions. Evans noted that strategic stock releases played an important role in cushioning the market earlier in the conflict, but argued that the ability to repeat those releases at similar scale is increasingly constrained.
Chinese demand represents another source of support. Even if elevated prices temper purchases, Evans said China’s crude requirements remain substantial and the country is unlikely to sustain the lower import levels seen earlier this year.
Taken together, PVM sees fewer mechanisms available to relieve the market if geopolitical disruptions persist. A resolution to the conflicts affecting oil flows would ease that pressure, but absent such a development, refinery constraints, shrinking inventories and compromised alternative shipping routes could continue supporting crude prices.
“The fixes of finding alternative means of delivery and ability to quench global demand with SPR are now starting to run their course,” Evans said. “Short of stopping both oil price affecting wars and curing the global refinery problem, our fraternity is wondering where an inoculation against $120 Brent can be found.”
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